What is Qualified Purpose in a Real Estate Exchange?

In a 1031 exchange, you need to hold your like-kind property with a “qualified purpose.” But what does that mean?

Qualified Purpose

A qualified purpose means that you are holding the property either as an investment or for use in your trade or business.  This means that you cannot do a 1031 exchange on your family home because this family home is being held primarily for personal use.

To avoid making a costly mistake before you sell, you should make the proper arrangements with an experienced qualified intermediary first so that the transaction is treated as a trade or exchange (rather than a sale and repurchase) to be sure that you qualify for maximum tax savings. Often deals are done informally without much of a contract or closing; a good QI can help add-back in the structure to make the deal work.

1031 Exchange Services

At CPEC1031 LLC, we work with clients across the United States on 1031 exchanges of all types. Our team of qualified intermediaries has over twenty years of experience and can help you through the details of your like-kind exchange. Contact us today to learn more about our extensive services and see how we can help. You can find us at our primary office located in downtown Minneapolis.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2022 Copyright Jeffrey R. Peterson All Rights Reserved

How to Qualify Your Property in a 1031 Exchange

Qualifying your property is an essential first step in the 1031 exchange process. In this article, we are going to explain how to qualify real property for a 1031 real estate exchange.

Qualifying Purpose

Any property used in a 1031 exchange needs to fit the IRS definition for 1031. Specifically, property must be “held for investment or productive use in a trade or business.” That may sound black and white, but there is often a lot of gray area that makes it difficult to determine whether or not a property qualifies. Here are some of the things that the IRS considers when evaluating a property for 1031 treatment:

• The purpose for which the property was initially acquired;

• The purpose for which the property was subsequently held;

• The purpose for which the property was being held at the time of sale;

• The extent of advertising, promotion of other active efforts used in soliciting buyers for the sale of the property;

• The listing of property with brokers;

• The extent to which improvements, if any, were made to the property;

• The frequency, number and continuity of sales;

• The extent and nature of the transaction;

• The ordinary course of business of the taxpayer;

• How long the property has been owned.

Minnesota 1031 Exchange Intermediaries

1031 exchanges require the help of an experienced professional to ensure that everything goes according to plan. The qualified intermediaries at CPEC1031 have decades of experience working with clients across the country on their real estate exchanges. Give us a call today to learn more about the like-kind exchange process and whether your property qualifies. Our primary office is located in downtown Minneapolis but we serve the entire state of Minnesota, as well as the rest of the country.

• Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2021 Copyright Jeffrey R. Peterson All Rights Reserved

1031 Holding Periods & The Qualified Purpose Requirement

What if there's a seller that has a lot for sale that they have owned for one year - can they do a 1031 exchange on the sale of that lot?

How Was the Property Held?

The answer to the question really depends on how they have held the property.

If they purchased the lot intending to use it for investment or business purposes then they can probably do the 1031 exchange because they held it for the requisite intent.

However if they bought the lot intending to flip it, holding it primarily for resale, then the IRS could make the argument that the property doesn't qualify for 1031 because it's their inventory.

The Qualified Purpose Question

The real question is has the taxpayer held the property for a qualified purpose?

The longer that you have held it for that qualified purpose the better. The IRS has never mandated or given a bright-line ruling on how long you have to hold your property prior to a 1031 exchange. Because of that ambiguity there is a lot of uncertainty as to how long one has to hold the property.

Sometimes people want to hold it for a year. Sometimes people want to cross over into the next tax year so they have at least one tax return under their belt. Other folks are very conservative and want to hold it for several years before they dispose of it in a 1031 transaction.

• Start Your Exchange: If you have questions about qualifying purpose, the held for requirement, or anything regarding 1031, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2017 Copyright Jeffrey R. Peterson All Rights Reserved

The 1031 Strike Zone - Does My Property Qualify?

Whether or not your property qualifies for a 1031 exchange is determined by whether or not it fits in the IRS’s strike zone for a 1031. Inside this strike zone are properties held for investment or business purposes. We have talked at length about the various types of property that fall within this strike zone, but what exists outside the strike zone for 1031 exchanges?

Outside the Strike Zone

Outside the 1031 strike zone are 2 major categories:

1. Properties used primarily for personal use like a lake cabin or a ski chalet, or the car you use to drive to the grocery store. You are not holding these for investment or business purposes. They are for personal use.

2. Inventory or property you hold primarily for resale. Let’s say a taxpayer buys a big tract of land and chops it up into parcels that they then sell to the public to build homes on. Is that taxpayer holding that property for investment or business purposes or are they holding it for inventory for sale to the public? A surly IRS agent would say the latter and deny a 1031 exchange.

So condo converters, developers, and even house rehabbers or flippers don’t fit neatly into the 1031 strike zone. If you fall into one of these categories and are considering a 1031 exchange, contact a qualified intermediary to discuss your options.

• Start Your Exchange: If you have questions about whether or not your Minnesota property qualifies for a 1031 exchange, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

© 2016 Copyright Jeffrey R. Peterson All Rights Reserved