WHAT IS “LIKE-KIND” PROPERTY?

“Like-kind” property does not mean “same type” property. “Like-kind” is one of the advantages of Section 1031 exchanges, because the definition is so broad. All real property is “like-kind” with all other real property. Any real estate held for investment or business can be exchanged for any other real estate to be used for investment or business. For example, you may exchange a rental house for a shopping center or unimproved land for an apartment building. The following are examples of “like-kind” property exchanges:

  • Residential for commercial
  • Bank building for swamp land
  • Bare land for residential
  • Fee simple interest for 30 year leasehold
  • Single family rental for multi-family rental
  • Non-income producing for income producing
  • Rental mountain cabin for a dental office in which the exchanger intends to practice

You must hold your property for investment or for productive use in your trade or business to qualify for Section 1031 treatment. The critical issue here is your purpose in holding the property—how you intend to use the property—rather than the type of property.

What you may not exchange is your residence or second home, nor may you acquire as your replacement property a house to be used as either. The intent to hold the property for personal use will prevent the property from qualifying for Section 1031 treatment unless you change how you treat or use it. For example, you could “convert” your second home to a valid exchange property and establish this intent by properly renting it and holding it as a legitimate rental property. Consultation with a tax advisor is important if you change how you intend to hold the property.

The intent to hold property “primarily for sale” will prevent it from qualifying for Section 1031 treatment. Most properties owned by developers, builders and people who perform rehabilitation work are held primarily for sale and may not be the subject of an exchange. When these properties are sold, they are subject to ordinary income taxes rather than capital gain taxes.

Partnership interests, LLC interests, notes secured by real property, contract vendor’s interests and foreign property do not qualify for Section 1031 treatment.

WHAT ARE SOME EXAMPLES?

NOTE: The content of this website is informational only. It does not constitute tax, legal or accounting advice. Each situation is different and you are advised to seek appropriate professional advice to see if a 1031 Exchange meets your needs.