What Is a Like-Kind Property?
Let me explain what a like-kind property is: it's two real estate assets that are similar in nature, no matter their grade or quality, and you can exchange them without facing any tax hit right away. According to the Internal Revenue Code under Section 1031, these are properties held for investment, trade, or business, qualifying them for a 1031 exchange. Both properties in the deal have to be for business or investment—personal homes don't cut it.
Key Takeaways
You need to know that like-kind properties are real estate of a similar type that you can swap without paying taxes under Section 1031 of the tax code. They have to be for business or investment, but they don't need to match in quality or grade. Your main home won't qualify for this. And remember, both properties must be in the United States to count as like-kind.
Understanding Like-Kind Properties
If you own qualifying business or investment properties, you can exchange them in what's called a like-kind or 1031 exchange, deferring taxes on capital gains as per U.S. tax code Section 1031. The property has to fit the IRS definition for this to work, and you can't just sell it outright—you have to exchange it to get the tax break.
The property must be in the U.S.; you can't sell a U.S. hotel and buy one in Dubai expecting to defer gains. Things like stocks, bonds, securities, partnership interests, or other financial assets don't qualify as like-kind.
Like-kind exchanges come in forms like simultaneous swaps on the same day or deferred ones where you have 180 days to wrap it up after starting. For instance, sell farmland, and you get 45 days to pick a replacement, then 180 days total to buy it—or by your tax return due date. The IRS might extend taxes to let you finish the exchange.
Don't think properties have to be identical in size or type; as long as they qualify, different ones work. But primary residences, mostly for personal use, are out. Properties must be for business or investment.
Examples of Like-Kind Property Exchanges
- A multifamily property for an industrial building
- Vacant land for a medical complex
- An apartment building for a shopping center
- A hotel for a retail property
- A condominium rental for a single-family rental
Special Considerations
The like-kind exchange still applies to real estate deals, but tax code changes have narrowed it down. It used to cover cars, art, even crypto, but now it's just real estate for business, trade, or investment.
Handling a 1031 exchange is complex, and mistakes cost a lot, so consider a reputable 1031 exchange company—they're often cheaper than hourly lawyers due to their volume, and they offer reliability from experience.
The Tax Cuts and Jobs Act from December 2017 cut out everything except real estate held for business or investment. There's debate on why real estate gets this tax perk while things like machinery face gains on every sale, but as of 2021, it's still a solid way to grow wealth in real estate without immediate taxes.
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