Does a Boatslip Qualify for a 1031 Like-Kind Exchange?

This is a question that I am asked quite often. And like most questions I receive, I will ask the client a few questions:

#1. How do you own the slip?

I have a great interest in how they own it. Do they have a lease for a determined period of time or do they own it fee simple?

This is also going to let us know, with an advisors help, wether or not the slip is considered real or personal property. It is important to know how the state judges the property as it is a state-by-state issue.

#2 How long have you owned the slip?

This is a VERY important aspect of any exchange. Thought there is not stated holding period for a property, the longer you hold it the better. Typically a two-year holding period is thought the be okay. If a client owns the property for a year or more, then you have now qualified it as for long-term capital gains, however, any time less than a year and you are entering the "GRAY AREA". The overall concern over time held is to be able to show investment or business use...which leads to the next question.

#3 What has been your use of the slip?

Again, a very important question as you are to have used the slip for business or investment. Since you may typically rent the slip, this would certainly show investment intent. But what if you were not able to rent the slip? There seems to be no difference between the actual renting of the slip or the attempt to rent the slip. You would want to make sure that you advertised it for rent personally or hired someone to do so (typically the marina) and you offered a fair-market rent. Make sure that your true intent shows through here.

# 4 What are you planning to purchase for replacement?

This questions will be more focused once we have discovered how your slip in treated as far as real or personal property. If you are found to own in fee simple as real estate, then your options are many. In a 1031 Like-Kind Exchange, real property is always like-kind for other real property, as long as it is held for investment or business purposes. This means you could sell the slip and purchase land, rental property, a warehouse, hotel, etc.

If the slip is considered to be owned as personal property, then you will be quite limited in a qualifying property in that personal property is only like-kind to property in the same class. Which in this case would mean slip for slip, rack for rack, etc.

Please do not think this would be the limit of questions asked in such an exchange, but this is what I would first like to know. After we have determined the answer to these questions, hopefully with help from the client's tax advisor, we would proceed.

Boat slips and racks are quite the popular investment these days. Many I have talked with had no idea that they could be exchanged. Please use this as a talking point with your cients...you never know...you just might pick up additional business!