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What Is a Like-Kind Exchange Property?

Chaya Ben by Chaya Ben
April 8, 2020
in Real Estate
0
What Is a Like-Kind Exchange Property?

When you use a 1031 exchange, the replacement property must be like-kind for the relinquished property. Despite this requirement, the Internal Revenue Code section 1031 does not provide a specific definition of what like-kind property is. Nonetheless, a working understanding of what qualified as 1031 property has emerged as the mechanism has been used.

Typically, investment real estate is always considered like-kind. Therefore, if you have one investment property that you are selling to buy another, it will likely qualify. The nature and character of the property are considered more important than the grade or quality. So, improved and unimproved real estate can be considered like-kind but personal property and real estate cannot.

What Doesn’t Qualify?

To identify what is like-kind 1031 property, it is easiest to start by defining what cannot qualify. If you are selling an investment property, a primary or secondary residence would not be considered like-kind. In other words, you cannot sell an investment property to buy a new home for your personal use and defer the taxes. It is worth noting that primary residences can qualify for tax exclusion under separate rules laid out in section 121.

Additionally, any property that is purchased primarily for resale is not considered like-kind. Typically, 1031 exchanges are used for properties that you will hold and generate income from.

Property in the United States cannot be exchanged for foreign property. So, to be considered like-kind, both properties must be within the U.S.

What Can Qualify?

As mentioned above, a diverse range of real estate types can be considered like-kind. If the property is used for production use or for investment, it can likely be considered like-kind. These are some examples of the types of properties that would qualify:

  • Restaurants
  • Vacant land
  • Commercial properties
  • Industrial facilities
  • Office complexes
  • Rental residences
  • Hotels
  • Childcare facilities

Many other types of property can qualify also. Again, the main consideration is whether the property will be used for productive or investment purposes.

The exchange does not need to be one-to-one. Additionally, the replacement properties do not all need to be of the same type of property. However, they all must be like-kind.

Explore Like-Kind Properties

Once you have used a 1031 exchange a few times, you will get a better sense of the like-kind rules. In some cases, it may be necessary to consult a tax law expert to determine whether a property can qualify as 1031 property. The better you understand these rules, the more advantage you can gain from them.

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