MAY A PERSON EXCHANGE ONE FORM OF BUSINESS, SUCH AS A HOTEL, FOR ANOTHER BUSINESS, SUCH A RESTAURANT? To answer this question, let’s keep in mind some general principals of a 1031 Exchange. A person’s business usually consists of three components: real property (real estate), personal property (usually depreciable tangible assets) and good will. If a person’s business has a real estate component, the real estate (or real property) qualifies as like-kind property with other real estate (real property). For example, a single-family rental can be exchanged for a duplex, raw land for a shopping center, or an office building for an apartment. Any combination of real property will work. Personal property, unlike real property, is more restricted in a 1031 Exchange. The IRS is less inclined to state that one type of personal property qualifies as like-kind for other personal property. For example, personal property may be characterized as depreciable tangible property, intangible property and nondepreciable personal property. Personal property within each category is not necessarily like-kind. Any personal property held as inventory does not qualify for exchange treatment. Good will is the remaining portion of the business that is not characterized as real property or personal property. The good will of the business does not qualify for a section 1031 exchange. So, with the information above in mind, it is well established that portions of a hotel business may be exchanged for portions of a restaurant. The real estate owned by the hotel may be exchanged for the real estate owned by the restaurant. It may be the hotel and restaurant own common assets that could qualify for a 1031 Exchange. The good will of the hotel could not be exchanged for the good will of the restaurant.


Powered by