"A National Qualified Intermediary for IRS Section 1031 Exchanges since 1989."

 

1031 Information Center™

Finding Answers     Master Topics     Keyword Search

Qualified Property - Topic 2

The first thing to do when considering a sale of appreciated real estate is to determine if property you are selling and property you are buying qualify for §1031 treatment. This is key step. Many real estate professionals and investors get involved in exchanges only to discover that one or more of the properties did not qualify for §1031 treatment. No matter how brilliant the transaction—no exchange. They could have saved a lot of time and money by first establishing the tax classification of the properties to see if all qualified.

Section 1031 exchanges are called by many names. Nontaxable exchanges, Like-Kind exchanges, and so on. But using the name like-kind can be confusing. To meet the requirements of §1031, both Relinquished Property and Replacement Property must qualify. In other words, both the property you are selling and the property you are buying must be qualified property of like-kind. If not, your exchange will fail and be classified as a sale. This is so important it needs repeating:

To be a like-kind exchange, the property must be both (1) qualifying property and (2) like-kind property.

For income tax purposes, real estate is divided into four classifications. Classification is made as of the date the transaction is made. The classifications are:

1.Held for business use (§1231)

2.Held for investment (§1221)

3.Held for personal use

4.Held primarily for sale (dealer property)Also see x

The first two classifications—held for business and held for investment—qualify for §1031 treatment. The second two—held for personal use and dealer property—do not.

The property you trade away is called Relinquished Property. The property you receive is called Replacement Property. You must actually own the Relinquished Property and must acquire ownership of the Replacement Property.

âNote: See Title Issues.

In Chase v. Comm., 92 TC 874 (1989), §1031 treatment was denied where a partnership-owned building was exchanged for a building that went directly to some of the limited partners. This was not eligible for 1031 treatment since neither the partnership nor the partners were owners on both ends of the transaction.

Some properties have more than one classification at the time of sale. For example, a farmer sells his farm including his personal residence. The sale or exchange is allocated between the real estate held for personal use (the personal residence) and the real estate held for use in a trade or business (the farm). Another example is the sale or exchange of a duplex where the seller lived in one unit and rented out the other unit. The sale would be allocated.

1. Real Estate Held for Personal Use    

This classification includes your primary residence, vacation homes and other property held for personal use. Your primary residence includes the dwelling unit and the land it's located on. The land alone, however, is not a residence. Land included with the sale of your personal residence might present an allocation problem. The question is—how much land can be sold with your personal residence and qualify for §121 exclusions? IRS has issued no definitive rules. Rather, each case is looked at separately. In Rev Proc 87-3, IRS says whether or not an owner uses property as a personal residence depends on all the facts and circumstances in each case, including the good faith of the owner. If any of the land is used for business or held for investment at the time of sale, an allocation of classification must be made.

The IRS and court cases have allowed up to 65 acres of land to be included as part of the residential classification. However, the rules indicate that more acres could be included if the facts and circumstances so warrant.

If real estate held for personal use is sold at a gain, gain not excluded under §121 is treated as a capital gain and subject to tax. If sold at a loss, the loss is personal and not deductible.

Exchange Treatment - Real estate held for personal use does not qualify for §1031 like-kind exchange treatment.

Interest paid to acquire a personal residence and one second home may be deducted as home mortgage interest if otherwise qualified.

For an in-depth discussion of exchanging vacation homes, see Special Issues in Chapter Eleven.

2. Real Estate Held for Use in a Trade or Business

This property is known as §1231 real estate. There are two types of real estate used in a trade or business:

1.owner occupied, and,

2.property is used in the owner's trade or business.

The act of renting real property qualifies it as property used in a trade or business.

Net gains from the sale or exchange of §1231 property are taxed as long-term capital gains. However, if the holding period is short, the gain may be recognized as ordinary income. Net losses are deductible as ordinary losses.

Exchange Treatment - IRC Section 1231 property qualifies for §1031 like-kind exchange treatment.

Interest paid to acquire §1231 real estate is deducted as business interest against the operation of the real estate business activity.

3. Real Estate Held for Investment

Investment real estate is a capital asset (IRC Section 1221). It's property held primarily for appreciation of value due to location, passage of time and other factors outside the activities of the owner. It is treated as a portfolio investment asset. An example of investment real estate is raw land held for appreciation. Even if purchased with the idea you might someday develop the property, if you don't develop it (for any reason), the property will not lose its classification as investment property.

Real estate used in a trade or business is not held for investment. Real estate held for personal use is not held for investment. If you have trouble understanding this, you are not alone. Many real estate people have trouble with this. After all, they have been selling property for years as a good investment. But remember, we are dealing with taxation here—not financial investments. The tax treatment of investment property is different than the tax treatment of business property—and the differences are profound.

If sold at a gain, the gain is a capital gain. If sold at a loss, the loss is a capital loss subject to the capital loss limitation rules.

Exchange Treatment - Investment real estate qualifies for §1031 like-kind exchange treatment.

Interest paid to acquire §1221 property is treated as investment interest and may be subject to special deduction limitations.

Real Estate Held for Sale to Customers

This classification is known as dealer property. To be classified dealer property, the property must be held at the time of sale or exchange

primarily for sale

to customers

in the ordinary course of business.

All three elements must exist at the time of sale or exchange or the property will not be classified dealer property. Primarily for sale means of the first importance. It does not have to constitute more than 50% of the purpose—it need only be the most important. The Supreme Court said, “If an owner acquires a property for rental or investment use, but also plans to sell the property and realize gain in any way he can if the original plan becomes unfeasible, he does not hold the property primarily for sale.”

All buyers of real estate are customers as the term is used here. The activity “in the ordinary course of business” must be directly related to the sale of that property. In addition, the activity must be “busy.” The two “busy” activities usually related to sales or exchanges are

1.sales activities related to the property, and,

2.physical improvements to the property.

Many people, including many IRS agents, misunderstand this activity. To be classified dealer property, there must exist a busy business activity directly related to that property. If you buy a parcel of land, subdivide it, and build houses for sale, there's no question you have dealer property. But if you buy a parcel of land, make no physical improvements, subdivide it by getting it rezoned and meeting other legal requirements, and sell it in the form of an unsolicited offer—you get capital gain treatment. The reason? No business activity related to the property.[iii]

If the property is listed with a licensed real estate broker, the sales activities of the real estate broker are not considered to be the sales activities of the owner.

The Tax Court has held the real estate activities of corporations owned or controlled by an individual cannot be attributed to him even though he may be engaged full-time as an officer of the corporation.

Licensed real estate brokers and salespersons ordinarily are not dealers. In Scheuber v. Com. 371 F2nd 996, it was held properties purchased by a licensed real estate broker (who intended ultimately to sell) and held for realization of appreciation in value over a substantial period of time were capital assets.

If dealer property is sold at a gain, the gain is taxed as ordinary income. If dealer property is sold at a loss, the loss is deductible as an ordinary loss.

Exchange Treatment - Dealer property does not qualify for 1031 like-kind exchange treatment.

Interest paid to acquire dealer property is deductible as business interest against the dealer property activity.

Every sale, exchange and purchase of real estate requires an allocation be made between the various classifications of property. These allocations are required because tax treatment of different classifications is unique. A simple, everyday example is the sale of a rental income property. The buyer of the property must make a cost allocation between the land (non-depreciable) and the building (depreciable). The seller treats the property as a sale of a single property since the land and building is treated as one property. [iv]

Many apartment rental properties require allocation among the building, the land and personal property such as furniture included with the rentals.

Ranch and farm property can require many classification allocations. These allocations include land, single-purpose agriculture buildings, multi-purpose agriculture buildings, fencing, water wells, irrigation systems, animals and poultry, producing trees and vines, and growing crops. Many ranch and farm sales include the farmer’s primary residence. The cost basis and the sales price allocation must be made to the residence and the underlying land related to residential use. This “carved out” sale is treated as the sale of a primary residence and may qualify for §121 exclusion benefits. The sale of a primary residence does not qualify for §1031 treatment since it is classified as real estate held for personal use.

If all or some of the property you want to sell does not qualify for §1031 treatment, a transfer of that property in an exchange transaction will be treated as a sale of that property. For more discussion on this issue, see Topic 3 dealing with treatment of unlike-kind (boot) property.

§1031(a) excludes these assets from nontaxable treatment:

Property you hold for personal use such as your primary residence.

Stock in trade and property held primarily for sale such as inventories and real estate held by dealers.

Stocks, bonds, notes, or other securities or evidences of indebtedness such as accounts receivable.

Partnership interests.

Notes

Choses in action.

Certificates of trust or beneficial interest

âCaution: It doesn’t matter if any of the excluded property items are related to real estate; they are always excluded from §1031 treatment. For example, a note secured by real property can never qualify.

For an exchange to be tax-free, both the Relinquished Property and the Replacement Property must be “qualified.” Qualified means held by you either for productive use in a trade or business or for investment.

Examples of property used in a trade or business are farms, ranches, rental income properties, industrial and commercial properties used by the owner in his business. All real estate qualifying for depreciation under Code Section 167 is deemed property used in a trade or business. This property is described in Code Section 1231(b).

An example of real property held for investment is unproductive land. Unproductive real estate held for future use or future realization of the increment in value is held for investment and not primarily for sale.

Two or more qualifying properties can be received in exchange for the transfer of a single property. Likewise, business property may be exchanged for investment property and vice versa. Qualifying newly constructed property can be exchanged for used property.

Properties can be “mixed” and qualify. For example, I exchange my duplex rental property and a lot I have held for investment for your farm. We both may qualify for §1031 treatment. There is no requirement your former property be held for business or investment use by the other party to the exchange. What the other party does with your property will not affect the tax-free status of the exchange for you.

Parallel Point 2-1

You own a 3-plex rental income property that qualifies for exchanging. You exchange for my home high up in the mountains of northern Arizona. To determine if my home—your Replacement Property—qualifies for §1031 treatment depends on your use of the property. If you establish it as rental income property it will qualify. However, if you decide to live there and make it your primary residence, your exchange will fail since the Replacement Property is not qualified.

Looking at it from my viewpoint, I do not qualify for §1031 treatment no matter what you do with my house after you acquire it. My transaction is treated as the sale of my primary residence and may qualify for the exclusion benefits under §121. I will treat the 3-plex as rental property income property if I continue to operate it as a rental.

What happens if I decide to move into one of the four units and occupy it as my primary residence? Tax rules would require me to classify the unit I occupy as the purchase of a primary residence. Basis would be allocated to the 3-units as the purchase of rental income property.

Like-kind is one of the most misused terms in real estate exchanging. Many use it to include the qualifying property requirement. Not so. Be sure not to confuse the term ‘like-kind’ with the term ‘qualified property’. The property must meet both definitions to get §1031 treatment.

The regulations broadly define the term “like-kind.”

“As used in Section 1031(a), the words 'like-kind' have reference to the nature or character of the property, and not to its grade or quality. One kind or class of property may not, under that section, be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. Unproductive real estate held by one other than a dealer for future use or future realization of the increment in value is held for investment and not primarily for sale.”

Real estate located in the 50 United States is of like-kind when exchanged for other real estate located in the 50 United States. The definition of “50 United States” means exactly that. It does not include foreign real estate.

Here are some examples of like-kind:

Improved real estate for unimproved real estate.

A leasehold of a fee with 30 years or more to run for real estate. For this purpose, optional renewal periods may be added to the initial term of the lease. See Sale-Leasebacks as Exchanges in Topic 11.

A fee interest in unimproved land for a fee interest in unimproved property subject to long-term income producing condominium leases.

A perpetual water right treated as real property under local law for a fee interest in land.

Timberlands differing in quality and quantity of timber.

Timberland, with a reservation of timber cutting rights, for timberland.

A remainder interest in farmland for a remainder interest in another parcel of farmland.

Farm land belonging to an incompetent for other farm land, even though the exchange took the form of a cash sale and purchase because it involved an incompetent and local law permitted no exchanges by guardians.[v]

â In LTR 9851039, the Internal Revenue Service ruled the exchange of an agricultural conservation easement for a farm property qualifies as a tax-free exchange under Section 1031(a). The IRS said a parcel of property was of like-kind when exchanged for a remainder interest in a parcel of property. The parties to the exchange were a trust and a corporation. The corporation had one class of stock. The trust owned most of the shares. The adult son of the trustor owned the rest. The corporation owned a parcel of land that it held as income producing rental property. The trust owned a parcel of property also held as income producing property.

The trust proposed to convey to corporation the property on which its headquarters was located in exchange for a vested remainder interest in the property owned by the corporation. After the exchange, the corporation would continue to use the property it gets in the exchange in its business.

The trust would hold its interest in the property it gets for investment. It would hold it as an income producing property when it ripens into a possessory interest at the end of a seven-year period. The IRS said the term "like-kind" refers to the nature or character of the property, not to its grade or quality. Therefore, certain factors, such as whether the property is improved or unimproved, are not relevant. The IRS said the nature and character of properties exchanged by the trust and corporation would constitute like-kind property. Because the nonpossessory interest would become a possessory interest and therefore, a fee interest, the rights vested in the parties were substantial.

Some interests in realty are so dissimilar that an exchange is not treated as like-kind property. Examples include the exchange of leasehold for a fee title unless the lease has 30 years or more to run. It includes the exchange of overriding oil royalties for a fee title. If a mineral interest is exchanged for other property, but the grantor retains a production interest in the minerals, the transaction is considered to be a lease rather that a sale. The property received in the exchange for the mineral interest will be treated as a lease bonus and taxed as ordinary income.[vi]

Real estate is a highly complex asset and exceedingly difficult to classify in many exchanges. In Rev Rul 55-749, the IRS said the exchange of land for perpetual water rights qualified as like-kind where the water rights were treated as real property under state law.

âIn Rev Rul 92-105, the IRS said a taxpayer's interest in an Illinois land trust would qualify as property of like-kind if exchanged in a §1031 exchange transaction. (Under Illinois law, land trusts can hold title to real property located in the state.) The ruling went on to say the same result would apply to similar arrangements under the laws of states having statutorily or judicially sanctioned arrangements similar to the Illinois land trust. These states are California, Florida, Hawaii, Indiana, North Dakota, and Virginia.

A land trust is a legal arrangement where the trustee holds title to real property. The beneficiary has exclusive power to direct or control the trustee in dealing with the title to the property. In addition, the beneficiary has exclusive control of the management of the property and the exclusive right to the earnings of the property.

A land trust arrangement usually includes a deed of trust and a land trust agreement. The deed transfers title to a trustee subject to the provisions of the land trust agreement. The land trust agreement authorizes the trustee to deal with the legal title to the property. The beneficiary keeps exclusive control of operating, buying, renting, and selling the property. Filing tax returns, paying taxes and other liabilities is the duty of the beneficiary.

The IRS said the exchange by the beneficiary of his interest in the land trust is an exchange of the underlying real property. It is not an exchange of beneficial interest or certificate of trust. Since the underlying property and the Replacement Property are like-kind, the exchange falls under the provisions of §1031.

â Tax Case - Exchange of Water Rights for Farmland Not Like-Kind Exchange. A U.S. district court granted the government's cross-motion for summary judgment after deciding that the exchange of water rights for farmland is not a like-kind exchange under section 1031.

Donald, Gary, and Deborah Wiechen were partners in a partnership, Wiechens Properties Limited Partnership, that owned land in an irrigation district. The partnership obtained the right to receive Colorado River water to irrigate its land and it was permitted to sell the water rights to the government without selling the land. The partnership retained the land but exchanged its water rights for an interest in farmland. The partners didn't report any income from the transaction, believing that it qualified for nonrecognition treatment under section 1031. The IRS made assessments against the partners for their 1993 taxes. The partners filed suit for a refund in district court. The parties filed motions for summary judgment. The partners argue that their water rights are an interest in real property, that the properties exchanged were of like-kind, and the exchange qualifies for nonrecognition treatment.

U.S. District Judge Stephen M. McNamee agreed with the partners that the water rights were an interest in real property. However, the parties disputed the duration of the water rights. The partners asserted that the water rights were perpetual, that they originated from the Supreme Court decision in State of Arizona v. State of California, 373 U.S. 546 (1963), and that the water rights were established by a Department of Interior water allocation notice, 48 Fed. Reg. 12446 (Mar. 24, 1983). Sustaining the government, the court dismissed the partners' reliance on the opinion and concluded that under a 1984 subcontract the partners were entitled to water rights for a 50-year period. Thus, the court concluded that the water rights are limited in quantity, priority, and to a 50-year duration.

Judge McNamee was persuaded by the government's argument and followed Rev. Rul. 55-749, 1955-2 C.B. 295, which discussed the exchange of water rights for a fee simple interest in land and advised that water rights of a limited amount or duration aren't sufficiently similar under §1031 to a fee simple interest in land. Thus, the court held that an exchange of nonperpetual water rights for a fee simple interest in land does not satisfy §1031. Judge McNamee denied the partners' motion for partial summary judgment and granted government's cross-motion for summary judgment.[vii]

â Here's an exchange that warmed the hearts of all exchangers and farm brokers throughout the land: Dave owned a farm. One day a state agency called, wanting to buy an agricultural conservation easement on his farm. The easement was treated under state law as an interest in land and defined as the right to prevent the use of the land for any purpose other than farming. Dave said OK but instead of selling and paying capital gains tax, he wanted to exchange for a fee simple interest in another farm. However, the state could not enter into an exchange agreement. So Dave signed an exchange agreement with a Qualified Intermediary. Under the exchange agreement, the intermediary acquired the farm Dave wanted and exchanged it with Dave for the easement. The intermediary sold the easement to the state and used the proceeds to buy the replacement farm conveyed to Dave. Cash boot paid and received by Dave was subject to the regular boot rules under §1031.

All requirements of the Qualified Intermediary safe harbor rules (Reg 1.1031(k)-1) were met and the property was of like-kind. Dave qualified for §1031 treatment, and got a deferred exchange. âSee IRS Letter Ruling 9232030.

Options to buy or sell real property must be considered in §1031 tax planning. Depending on the classification of the underlying real property, an option may qualify for §1031 treatment.

An option contract may be

a binding agreement by the owner of real estate giving another the right to buy the property at a fixed or determinable price within a specified time, or,

it may be a binding agreement by the owner of property and another giving the owner the right to sell the property to the other person at a fixed or determinable price within a specified time.

A right of first refusal is not an option. Nor is executory contract to sell land in the future.

Gain or loss on the sale or exchange of an option takes on the same character as the underlying property; it is considered gain or loss from the sale or exchange of property. The option contract takes on the same classification as the property (to which it relates) would have if acquired by the optionee buyer.

A taxpayer granted another party an option to purchase property. The property qualified for like-kind treatment in the hands of the taxpayer. The other person exercised the option by transferring like-kind property to the taxpayer. IRS said it was a good like-kind exchange because both the Relinquished Property and Replacement Property were used in the taxpayer’s business. The transaction did not qualify as a like-kind exchange for the other party. The property he transferred to the taxpayer was acquired solely for the purpose of making the exchange and not held for use in a trade or business or held for investment.[viii]

An option is an agreement between a seller (optionor) and a buyer (optionee) to keep open, over a set period of time, an offer to sell property. It's a unilateral agreement imposing an obligation only on the seller. He must sell if the buyer exercises the option. But the buyer is not obligated to buy the property if he chooses not to.

People use options because they offer advantages to both buyer and seller. They give the buyer time to decide if he really wants to buy the property and arrange financing. They give the seller compensation for taking the property off the market during the option period.

The option must be supported by its own consideration, separate and independent of the purchase price of the property. It creates a contractual right and does not give the buyer any estate in the property. When the buyer acquires an option to buy real estate, he gets the right to buy the property at any time within a specified time period at the price specified in the option. What he pays for the option depends on the circumstances, but it will be small compared with the selling price of the property. If the buyer fails to exercise the option, he loses the amount he paid for it.

Options involve tax consequences for both parties. Two issues are involved: when is tax imposed and is the gain a capital gain or ordinary. Tax may also be incurred if the option is sold or exchanged.

Reminder: Gain or loss from the sale or exchange of an option contract is considered gain or loss from the sale or exchange of property. The option contract takes on the same classification as the property (to which it relates) would have if acquired by the optionee buyer.

Business Property (§1231)—If the underlying property would have been business property in the hands of the optionee, the gain or loss is subject to §1231 treatment. To qualify, the option must have been held for more than one year. Under Section 1231, gain is treated as long-term capital gain. Loss is treated as ordinary loss.

If the holding period of the option is one year or less, gain is treated as ordinary income. Loss is treated as ordinary loss.

Investment Property (§1221)—If the underlying property would have been investment property in the hands of the optionee, capital gain or loss is realized. If the option was “held” for more than one year, the capital loss is long-term. If one year or less, short-term.

Personal Use Property—If the underlying property would have been real estate held for personal use in the hands of the optionee, gain is treated as capital gain. If a loss is suffered, it is personal and not deductible.

Parallel Point 2-2

Dealer Property—If the underlying property would have been real estate held as property for sale to customers in the ordinary course of his trade or business by the optionee, any gain is treated as ordinary income. Any loss is treated as a deductible ordinary loss.

If one of the properties in an exchange is held primarily for sale, the exchange of that property does not qualify for §1031 treatment. Held primarily for sale is not limited to dealers. Property was deemed held primarily for sale and not for investment where it was sold under a “prearranged plan” shortly after it was acquired in an exchange.

Property acquired in an exchange and leased with option to buy is not held for use in business or for investment.

Your intention to eventually give away property you receive in an exchange will not defeat the exchange if the exchange is not a part of the gift transaction. In one case, the gift of a ranch received in an exchange was made to the taxpayer's children 9 months after the exchange. His general desire at the time of exchange was to eventually transfer it to his children and was not, in the court's view, inconsistent with his intent at that time to hold the ranch for productive use in business or for investment. He had no concrete plans to do so at the time of exchange.

We know both the Relinquished Property and the Replacement Property must be held for use in a trade or business or for investment. The big question that comes up more than any other is, “Yes, but for how long?” It’s a tough one to answer because the statute is silent on this issue. Therefore, it must be examined on individual facts and circumstances. There is no safe holding period for property to automatically qualify.

IRS has ruled that property transferred to a controlled corporation immediately following the exchange did not qualify.[ix] However, a general intention to make a future transfer is probably OK. In one case, the taxpayer gifted the Replacement Property to his children nine months after the exchange. The court said the exchange was OK because even though the taxpayer contemplated eventually gifting the property to his children, he had no concrete plans to do so at the time of the exchange.[x]

Many time period holding problems created by taxpayers are linked to rental income property and the personal residence. How long must I operate the Replacement Property as a rental before I move in and occupy it as my primary residence? Again, it’s a matter of facts and circumstances. For example, at the time of the exchange, you have no intention of converting it to your primary residence. But an unforeseen event, not related to the exchange, takes place—perhaps the death of a spouse. Or the rental turns out to be an unbearable negative cash flow situation. In such cases, you should have no problem supporting the like-kind exchange.

Here is a general rule-of-thumb I have used for many years with success. To be on the safe side, you should hold the Replacement Property for at least two yeas. In my opinion, this is the magic number. In a private letter ruling, the IRS told one taxpayer one year was not long enough to hold several rental houses being acquired as Replacement Property before they were sold. But the IRS did say two years would meet the intent of the statute and the properties could qualify if sold after the two-year holding period.

The two-year holding period pops up in many places. That’s the minimum holding period applying to the exchange with a relative rule. (See discussion in Chapter Eleven) It’s the same for the installment sale rules between related parties. And it’s also the minimum time period a taxpayer must live in their primary residence to qualify for the §121 exclusion benefits on the sale of the residence.

If you have any doubts or questions about the classification of either your Relinquished Property or Replacement Property, be sure to discuss it with both your tax professional and your real estate agent.

The location of properties being exchanged is important. For purposes of the nonrecognition rules of §1031, real property located outside the United States does not qualify as like-kind property if exchanged for real property located in the United States. United States real property means property located within the fifty states and the District of Columbia. Property located in Guam, Puerto Rico, and U.S. possessions are treated as foreign real estate and do not qualify.

When this amendment was added, The Conference Committee Report stated no inference was intended to override or otherwise modify Section 932 involving the tax treatment of U.S. and Virgin Islands residents. Accordingly, real estate located in the U.S. Virgin Islands may qualify for §1031 treatment when traded for U.S. real estate.

Partnership interests are specifically excluded from like-kind exchange treatment. A partner's exchange of an interest in one partnership for another partner's interest in a different partnership cannot qualify for §1031 treatment. This rule does not apply to exchanges of interests in the same partnership.

A partnership as a business entity can qualify to exchange real estate it owns for other real estate.

âIn LTR 9807013, the IRS said a limited partnership would be treated as having received replacement properties through single-owner entities and qualifies for §1031 treatment.
 
The limited partnership owned land and an office building leased under a long-term lease. The limited partnership wanted to dispose of the land and building and acquire several parcels of real estate. It located someone interested in buying the land and building. The limited partnership proposed to transfer title directly to a Qualified Intermediary and then form separate entities to take title from the QI for each of the replacement properties. The limited partnership would be the sole owner of each "replacement entity.” These entities would then either elect to be disregarded as an entity or would rely on the default classification for single-owner entities.
 
For discussion of strategy using §1031 to Split Up Partners and Investors in Real Estate see Topic 11.

Many exchanges involve multiple properties. For example, you exchange a rental property and two investment parcels for a larger apartment complex. Or you exchange one property for three others. Or you exchange two properties for two others. These transactions follow the same rules as a one-for-one §1031 deferred exchange with addition requirements for allocating “sales price” and “substituted basis” to the assorted properties.

Detailed coverage of this important subject is reported in  Exchanges of Multiple Properties.

An exchange of assets of a business for the assets of a similar business cannot be treated as exchange of one property for another property. An analysis of each asset involved in the exchange determines if you are engaged in a like-kind exchange for some or all of the assets.

The IRS issued AdvRevRul 89-121 to clarify an older ruling (Rev Rul 85-135) dealing with the transfer of multiple properties in a §1031 exchange. The advance ruling limits the application of §1031 provisions in an exchange of several assets of one business for a single asset of another.

Reg 1.1031(j)-1 explains rules dealing with exchanges of multiple assets.