Chapter § 55.2 QUALIFIED PROPERTY

• Jurisdiction: Oregon

§ 55.2 QUALIFIED PROPERTY

Qualified property is property held in the exchanger's trade or business or held for investment. IRC § 1031(a)(1). Trade or business property can be exchanged for investment property, and investment property can be exchanged for trade or business property. Treas Reg § 1.1031(a)-1(a) (but see excluded property in § 55.2-1). The use of the property by the other party to the exchange is irrelevant. See Rev Rul 75-291, 1975-2 CB 332. In other words, whether the other party to the exchange plans to use the relinquished property in its trade or business, for investment, or for any other purpose is unimportant. It is important only that the exchanger use the relinquished property and the replacement property for investment or in its trade or business. Acquiring relinquished property only for the purpose of selling it and completing an exchange will not meet the requirement that the relinquished property be held for investment. Rev Rul 77-297, 1977-2 CB 304; Rev Rul 75-291.

§ 55.2-1 Excluded Property

Under IRC section 1031(a)(2), qualified property can never include the following types of property:

(1) Stock in trade or other property held primarily for sale (which can include real property held by a developer or other dealers in real property);

(2) Stocks, bonds, or notes;

(3) Securities or other evidence of indebtedness;

(4) Interest in a partnership (unless the partnership elects out of partnership status under IRC section 761(a)); or

(5) Choses in action (e.g., a lawsuit).

§ 55.2-2 Mixed-Use Property

§ 55.2-2(a) Business Use of Personal Residence

If a personal residence was partially used for business, the transaction must be bifurcated; only the portion used for business qualifies for tax-free treatment under IRC section 1031, and the remainder might be eligible for a tax-free sale under IRC section 121 (former IRC § 1034, repealed by Taxpayer Relief Act of 1997, Pub L 105-34, § 312(b), 111 Stat 839). See Rev Rul 82-26, 1982-1 CB 114; Rev Rul 59-229, 1959-2 CB 180.

The acquisition of a home with a home office in exchange for other property qualified as a tax-free exchange under IRC section 1031. Priv Ltr Rul 85-08-095 (Nov 29, 1984).

An exchange of a 1.8-acre lot held for investment that included a one-half acre portion that the exchanger used as his residence was taxable to the extent of the value of the one-half acre portion of the property, because that portion was not previously held by the exchanger for investment. Priv Ltr Rul 94-31-025 (Aug 5, 1994).

In a case in which the question was whether property would be treated as a residence for purposes of the gain-rollover provisions of former IRC section 1034, an entire 80-acre parcel of property was considered to be the exchanger's residence, even though 54 of the acres were used for growing and harvesting trees. The court considered the exchanger's intent in holding the property and found it persuasive that the exchanger sold the property as a residence and not at a higher value as timberland. Bittner v. Dep't of Revenue, 15 Or Tax 18, 22 (1999).

See Michael M. Megaard & Susan L. Megaard, Reducing Taxes on the Disposition of a Personal Residence with Acreage, 20 J Real Est Tax'n 269 (1993) (excellent analysis of how to structure sale of residence and adjoining acreage); Zoel W. Daughtrey, Frank M. Messina & Philip E. Harris, How Much Acreage Can Be Included Under the New Sale of Principal Residence Rules?, 90 J Tax'n 294 (1999).

§ 55.2-2(b) Vacation Home

A vacation home that was not rented did not qualify as either relinquished property or replacement property because the property was not held for investment. Moore v. C.I.R., 93 TCM (CCH) 1275 (2007). But a commentator has suggested that "property purchased for its probable appreciation, even if said property is used primarily for personal use" should qualify for section 1031 tax-free exchange treatment. Ari Meltzer, Solving the Personal Use/Investment Dilemma for Like-Kind Exchanges: Moore v. Commissioner, 63 Tax Law 267, 268 (2009). The IRS has provided a safe harbor for vacation homes and will not challenge the status of a vacation home as investment property if:

(1) For relinquished property, the taxpayer held the property for 24 months immediately before the exchange and, in each of the two 12-month periods before the exchange, rented it at fair rental value for at least 14 days and did not make...