The Napkin Test in a 1031 Exchange refers to an informal method of determining whether a property is eligible for a 1031 Exchange. The test involves drawing a line down the middle of a piece of paper, and writing “like-kind” on one side, and “not like-kind” on the other side. Then, the taxpayer writes down the properties being considered for exchange on either side of the line, to determine whether they are of “like-kind” or “not like-kind”.
- The Napkin Test is a simple, informal method of determining whether properties are eligible for a 1031 Exchange.
- The Napkin Test is not a legally binding method, and should not be relied upon as the sole method of determining eligibility.
- The Napkin Test is not a substitute for a thorough analysis of the properties and their eligibility for a 1031 Exchange.
A taxpayer is considering exchanging a rental property for a commercial property. The taxpayer writes “rental property” on the “like-kind” side of the paper, and “commercial property” on the “not like-kind” side of the paper. According to the napkin test, the properties are considered “like-kind” and eligible for a 1031 Exchange.
- The Napkin Test should be used as a starting point, and not relied upon as the sole method of determining eligibility.
- The taxpayer should consult a qualified intermediary or tax professional for a thorough analysis of the properties and their eligibility for a 1031 Exchange.
- The taxpayer should be aware of the rules and regulations of a 1031 Exchange, and be prepared to provide necessary information and documentation to support their exchange.
- Use the Napkin Test as a starting point, and not as the sole method of determining eligibility.
- Seek the advice of a qualified intermediary or tax professional for a thorough analysis of the properties and their eligibility for a 1031 Exchange.
- Be aware of the rules and regulations of a 1031 Exchange, and be prepared to provide necessary information and documentation to support the exchange.
