One of the basic concepts of a 1031 exchange is if something qualifies as “real estate” under state law, it qualifies as “real estate” for purposes of a 1031 exchange. For example, several years ago we were involved in an exchange of an oil and gas pipeline that crossed several states. Whether or not that pipeline was considered real estate depended on the laws of each state. As a result, we ended up with a situation where the portion of the pipeline in one state was classified as real estate, even though it was above ground, while another section of pipeline in another state was NOT considered real estate, even though it was buried in the ground.
In a recently released court case, the IRS challenged a state’s characterization of a property. This is the first time I’ve seen them do this, and it causes me some concern with how some types of exchanges are handled in Colorado.
It Doesn’t End at 15%
Handling Closing Costs in a 1031 Exchange
IRS Challenges State's Definition of Real Estate in a 1031 Exchange