When a taxpayer is considering performing a tax deferred exchange, the first matter the taxpayer must consider is whether the property the taxpayer is considering selling will qualify for non-recognition under 1031. While this point may seem obvious to many, a number of taxpayers presume that any time they sell an interest that is related in some way to real estate, they automatically qualify. This is not the case at all. All taxpayers bear the burden of establishing that the property being sold qualifies under 1031. To qualify, the taxpayer must satisfy the requirement that the property has been held "for productive use in a trade or business or for investment" which was set forth from the enactment of tax deferred exchanges in 1921. Some types of assets will never qualify for non-recognition treatment. In addition to the taxpayer's primary residence and certain vacation homes held primarily for personal use, these types of property include the following: 1. Stock in trade or other property held primarily for sale: The exclusion encompasses two aspects: "Stock in trade," which is property held for sale to customers in the ordinary course of the taxpayers' trade or business resulting in gain taxed as ordinary income and; "Property held primarily for sale," which is a much more expansive category of excluded property. The word primarily is viewed as being held "principally" or "of first importance." (Malat v. Riddell, 383 US 569, 5 L. Ed. 2d 154, 86 S. Ct. 244 (1966)).The IRS considers property held primarily for any disposition as falling into the category of property held primarily for sale. (Rev Rul 75-292, 1975-2 CB 333; Wagnesen v. Comm., 74 TC 653 [1980]). See Asset Preservation's flyer titled, "Property Held for Sale" for a more exhaustive list of factors the IRS reviews to determine if a taxpayer is holding a property primarily for sale. 2. Stocks, bonds or notes: Although stocks can be exchanged in a corporate reorganization under IRC 1036(a) and certain U.S. bonds under IRC 1037, none of these types of transactions qualify for tax deferral under IRC 1031. However, that this exclusion does not mean that a N.Y. or other co-op apartment if held for investment cannot be used in a 1031 exchange. In fact, many authorities can be cited indicating the contrary based on several different theories. Included in the determination that N.Y. co-op apartments held for investment qualify for non- recognition under 1031 is the fact that in addition to a share of stock, taxpayers acquire a long term proprietary lease in the property which has been considered akin to a fee (see Letter Ruling 200137032) and that N.Y. co-ops have long been treated as real property in many ways. These real property traits include mortgage interest and real estate tax deductibility and the applicability of transfer taxes and homestead exemptions to N.Y. cooperatives. The general authority is that N.Y. co-op apartments held for investment will generally qualify for non-recognition treatment in an exchange. 3. Other securities of evidences of indebtedness or interest: The scope of this category is not clear because most of the court cases addressing this category are obsolete after the 1984 amendment excluding partnerships interests from 1031 deferral. This exclusion is cited for the proposition that mortgage's and notes will not qualify for non-recognition. Check with your tax and/or legal advisor for further advice on the issue. 4. Interests in a partnership: In 1984, the exclusion of an interest in a partnership was added to the IRC. (Tax Reform Act of 1984, Pub. L. No.98-369, 98 Stat.494: IRC 1031(a)(2)(D)). Although a partnership or limited liability company (LLC) can perform an exchange at the entity level, the individual partnership interest or LLC member interest is excluded. However, an interest in a partnership that has made a valid election under IRC 761(a), to be excluded from the application of subchapter K, is treated as an interest in each of the assets of the partnership and not as an interest in a partnership. A thorough discussion is beyond the scope of this article and taxpayers should get guidance from their tax and/or legal advisors regarding timing and other issues involving exchanges where property has been held in a partnership or LLC. See also my article titled, "What Happens When One Partner Does Not Want to Exchange?," New York Real Estate Journal, December 19, 2006 for a fuller discussion of partnership issues. 5. Certificates of trust or beneficial interests: These represent a right to an interest in the stock or a corporation and are not generally considered real property. Certain beneficial interests, such as those in a Delaware Statutory Trust and others, may qualify for non-recognition treatment. Outside of the Delaware Statutory Trust arena, most of the cases in which beneficial interests have been deemed to qualify for non-recognition have focused on the fact that the power to act with respect to the assets in the trust are vested in the beneficiaries under the trust documents with the trustee holding merely legal title to the property. For further guidance on when beneficial interests may qualify for non-recognition, check with your legal advisor. 6. Choses in action: A chose in action is a right to recover or receive money or other consideration or property, but a chose in action is not considered property in itself. Courts typically look to state law for the definition of a chose in action. [See Miller v. U.S., 63-2 USTC & 9606, SD Ind 1963]. The chose in action exclusion is vague due to the difficulty in defining the term itself and it has rarely been used to disallow non-recognition treatment in an exchange. Pamela Michaels, Esq., is an attorney and a VP of Asset Preservation, Inc., New York, N.Y.