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A sole proprietor exchanges an office building used in her business for undeveloped land she plans to hold for investment purposes. Will the exchange qualify as like-kind?

1) Yes
2) No

1 Answer

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Final answer:

No, the exchange of an office building for undeveloped land held for investment will not qualify as a like-kind exchange, as their uses differ and do not meet the criteria set by IRS rules for like-kind property.

Step-by-step explanation:

The exchange of an office building used in business for undeveloped land intended to be held for investment purposes will not qualify as a like-kind exchange under the Internal Revenue Code (IRC) Section 1031. Like-kind exchanges apply to property held for productive use in a business or for investment. However, the IRS considers undeveloped land held for investment not to be of the same nature or character as an office building used in a trade or business because their use differs significantly.

For a successful like-kind exchange, the properties exchanged must be of similar use and character, even if they differ in grade or quality. Therefore, when a sole proprietor swaps a property used in business, like an office building, for land that is not of a similar use (investment purpose), it does not meet the requirements for a like-kind exchange as delineated by tax law.

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