A 1031 exchange is a tax-deferred investment strategy that lets you swap two like-kind properties. Since the transaction may qualify for tax deferral, you can delay capital gains tax payments and preserve your capital. However, taxes are not eliminated and may apply under certain circumstances. The types of assets you can exchange are regulated by the IRS, so you can’t exchange properties on a whim.
These restrictions lead some investors to wonder whether or not manufactured homes are eligible. Can you do a like-kind exchange on a manufactured home? It’s possible, but eligibility depends on whether the manufactured home qualifies as real property under both federal and applicable state law, which can vary by jurisdiction. Below, Realized 1031 has shared a guide to break down the concepts and help you understand how this type of exchange works.
The IRS has set rules surrounding 1031 exchanges to prevent abuse and maintain the transaction’s integrity. While there are many regulations and provisions, there are a few that are highly relevant to this discussion.
Manufactured homes are any type of prefabricated housing built in a factory and then moved to a final site. These homes are constructed according to federal U.S. Department of Housing and Urban Development (HUD) building codes, rather than local building codes like site-built homes. In many contexts, manufactured homes are also called mobile homes. The formal term “manufactured” only began when HUD standards went into effect in 1976.
There are many types of manufactured homes. Here are the most common categories.
Manufactured homes often fall into a gray area between real and personal property. Remember that only real property is eligible for the 1031 exchange. As such, how the manufactured home is titled and affixed to the land plays a major role in its qualification.
A manufactured home may still be considered personal property if it can be moved with instruments like wheels. This classification also applies to homes that can be tilted like vehicles.
On the other hand, a manufactured home that has been permanently affixed to the land, taxed as real estate, and recorded as such by local or county authorities may be classified as real property. However, qualification for a 1031 exchange depends on applicable state law and IRS interpretation, and must be assessed on a case-by-case basis.
With the requirements we discussed, here are some practical considerations that may help position a manufactured home to qualify as real property for purposes of a 1031 exchange. Actual eligibility is determined by applicable state law and IRS standards, so investors should consult legal and tax professionals before proceeding.
Meeting these conditions does not guarantee eligibility, but aligning with them may improve the likelihood that the property will be treated as real property.
It is possible to complete a like-kind exchange involving a manufactured home, provided the home meets specific criteria. To qualify, the home must be permanently affixed to land, classified and titled as real property under applicable state law, and held for investment or business use. However, eligibility is not automatic and must be determined based on federal tax law and the governing laws of the state where the property is located. Because the qualification process can be nuanced, investors should consult with 1031 exchange professionals, qualified intermediaries, and legal or tax advisors to assess whether their manufactured home may meet the requirements.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources:
https://www.huduser.gov/portal/sites/default/files/pdf/Info-Brief-SingleFamilyHomeowners.pdf
https://www.investopedia.com/terms/s/section1031.asp
https://cishomeloans.com/blog/how-to-make-a-manufactured-home-real-property/