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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.

Peter McCrea had a client who wanted to sell a piece of undeveloped land in order to invest in a new hedge fund. It was obvious to both McCrea and his client that selling a $5milliion chunk of property with virtually no cost basis would result in a hefty tax bill. So McCrea—an advisor with 1031place.com, a subsidiary of LHO Group in New Canaan, Conn.—suggested instead that his client exchange the property for an income-earning interest in it that could be mortgaged after closing. McCrea's strategy allowed the client to liquidate and reinvest 100 percent of his equity without incurring taxes, retain a real estate allocation with the potential for appreciation, and invest in the hedge fund—thus achieving his main objective.

Introduction: The Entrepreneur Magazine Legal Show with Garrett Sutton, Live Tuesdays from 10-11am Pacific time: 888-327-0061; The IRS allows you to sell real estate without paying taxes. Using a special section of the IRS code, you can exchange properties tax free. Introduction: Gary Gorman, author of, "Exchanging UP! How to build a real estate investing empire without paying taxes using 1031 exchanges." What does a 1031 exchange do? Rolling gain from the Old Property over to the new. What do I have to do to get tax free treatment? The 6 things: 1. Both the Old Property you're selling and the New Property you're buying have to be held for investment. Can you use your personal residence for this? Investment property; can I buy any other kind of investment property?

Colorado Securities Commissioner, Fred Joseph has determined that TIC interests sold in the state of Colorado by Mile High Capital and Replacement Property Solutions are considered securities rather than real estate.  Replacement Property Solutions was the qualified intermediary arm of Mile High Capital, a real estate investment firm.  Both companies have been closed by the State and their principals indicted for securities fraud.

A TIC (Tenant-In-Common) interest is a small ownership slice of a large property.  In 2002 the IRS ruled that TIC interests qualify for 1031 exchanges.  This means an investor can sell a piece of investment property and buy a partial interest in a large property, such as an office building or an apartment complex.  Prior to the IRS ruling, there was confusion as to whether TICs were treated as real estate, or as partnership interests (which are not allowed as 1031 exchange replacement property).