With 1031 investment, you can use a portion of your profits to acquire new property to defer taxes. The IRS does not specify what type of assets are acceptable, but some guidelines will be helpful when you begin the process.
Please note that any real estate or other personal property sold as part of 1031 must have been held for business or investment purposes and NOT for personal use.
The guidelines below may help you identify your potential assets that qualify for the 1031 exchange:
1) Real estate
You can sell commercial, industrial, land, or personal property in a 1031 exchange. You can also acquire existing rental property, fixer-uppers, or other properties in need of repair or improvement, as well as raw land or undeveloped property.
2) Stocks and Bonds
Securities include stocks, bonds, mutual funds, notes, options, and “other financial instruments” (such as accounts receivable). Generally speaking, most types of securities can be eligible for 1031 Exchange under the right conditions.
3) Gold and Silver Bullion
You can trade gold or silver coins, as well as bullion of almost any kind. As a reminder, 1031 does not apply to collectibles such as art, baseball cards, stamps, wine, and other similar assets.
4) Business Accounts Receivable
Accounts receivable is any monies owed to you for goods or services provided within your business, including accounts receivable on the sale of investment property.
5) Business Inventory
Inventory can include raw materials, work in progress, finished goods. The stock must have been acquired with the intent to resell at a later date.
6) Partnership Interests
The 1031 exchange rules allow you to trade a partnership interest in return for another partnership interest without triggering taxation. It can be helpful in limited circumstances, such as when the cash flow is reinvested in further real estate investment partnerships.
7) Rights and Licenses
Rights and licenses may include patents, trademarks, permits, and royalties. Royalties can consist of anything from oil and gas rights to patents on products you’ve invented, copyrights on books or videos you’ve created, musical compositions, etc.
According to the IRS, farmland is any agricultural or horticultural land, including farm buildings and structures such as barns. It does not include forests, valuable timber tracts, or unimproved land that is not suitable for farming purposes.
9) Business Equipment and Furniture
Business equipment such as machinery, office furniture, computers, and related hardware can be 1031 Exchange assets. Essential to this type of asset’s exemption from the general rule against exchange of personal property for business or investment purposes is that the seller of such an item ensures that it still be used in a qualifying business at least two years after its sale.
Collectibles include art, antiques, commodities, coins, and stamps. These items must be held for personal use to qualify for a 1031 exchange.
You can 1031 aircraft in much the same way as other types of business equipment. The catch is that the rules apply to piston-engine planes, not jets or helicopters. It’s crucial when trading an airplane to be familiar with the different types and models.
You must plan for 1031 exchanges because the identification and acquisition of replacement property must be completed within 45 days after the sale of your relinquished property.