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SECTION 1031 BASICS

February 10, 2005

Yesterday's post on the Teruya Brothers case omitted many details of the workings of Section 1031 in the interests of brevity (ok, maybe "less excessive length" is more accurate).

Some basics about Section 1031:

Large classes of property can never qualify for a Section 1031 like-kind exchange. These include:

-Inventory
-Stocks, bonds, notes, indebtedness, or other securities
-Partnership interests
-Choses in action
-Interests in trusts.

WHAT IS "LIKE-KIND?" In general, real estate is like-kind to other real estate. For example, a farm is like-kind to an apartment building. Personal property is more complicated. Two items are generally like-kind if they are in the same "general asset class" of Rev. Proc. 87-56, or if they are in the same 4-digit "product class" of Division D ("Manufacturing") of the Federal listing of Standard Industrial Codes.

But beware: livestock of different sexes are never "like-kind."

PERSONAL-USE PROPERTY DOES NOT QUALIFY. You can exchange any "like-kind" property that has been "held for investment" or for "use in a trade or business" for other "like-kind" property that will be held for investment or use in a trade or business. You can't get like-kind exchange treatment for your refrigererator, no matter how valuable it has become.

DON'T TRY THIS AT HOME! There are any number of foot-faults that can cause a like-kind exchange to fail. It is a technical area, especially when escrows or intermediaries are involved.

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