Investment properties vs. Residential properties

In the context of a 1031 exchange, an investment property refers to real estate that is held for investment purposes or for use in a trade or business.

To be considered an investment property for a 1031 exchange, the property must meet the following criteria:

1. Held for Investment: The property must be held primarily for investment purposes, which means it is intended to generate income or appreciate in value over time. It can be a rental property, commercial property, vacant land held for investment, or any other property used for business or investment purposes.

2. Trade or Business Use: The property can also qualify if it is used in a trade or business. This includes properties used in a taxpayer’s own business, such as an office building or a retail store. However, personal residences or properties primarily used for personal purposes do not qualify.

The term “investment property” is used to distinguish properties that are eligible for a like-kind exchange under Section 1031 of the Internal Revenue Code from properties that are held for personal use or as a primary residence, which do not qualify.