Definition of like kind in a 1031 exchange

Real estate investors who sell a property can sometimes take advantage of a section in the U. IRS’ tax code that allows them to defer capital gains or losses on the property. The term refers to the nature or character of the property , rather than its grade or quality. This means that you can only exchange real estate for real estate and tangible assets for tangible assets.

The definition of like-kind real estate is fairly loose.

Any type of investment property can be exchanged for another type, or like - kind investment property. For example, a single-family rental can be exchanged for a duplex, raw land for a shopping center, an office for apartments. Legal Definition of like - kind exchange. Internal Revenue Code and is thus exempt from taxation. The term like - kind property refers to the nature or character of the property, rather than its grade or quality.

Like - Kind Property. Real property must be exchanged for like - kind real property.

It states that the basis of the new property is the same as the basis of the property given up, minus any money received by the taxpayer, plus any gain (or minus any loss) recognized on the transaction. Instead of paying capital gains taxes on the sale, the investor is allowed to use the funds to acquire new property and defer. The term like-kind property refers to the nature or character of the property, rather than its grade or quality.

A method of deferring capital gains taxes on the sale or disposition of an asset held for business or investment purposes by exchanging the asset, or proceeds from the sale of the asset, into like - kind property to be held for. As the market continues to improve it seems many Investors have the desire to Exchange into a different form of Real Estate Investment and this leads us to the question of what are like - kind ? WHAT IS LIKE - KIND ? Deferred exchanges are more complex but allow flexibility. They allow you to dispose of property and subsequently acquire one or more other like - kind replacement properties. Routine selling expenses such as broker commissions or title closing fees will not create a tax liability. The exchange requirements are the same for both real property and personal property.

That sai unlike the broad definition of like - kind property for real property , it becomes more difficult to state when personal property is like - kind to other personal property. The difficulty stems from the many different ways to categorize personal property. Do it right, and there is no tax. Both properties must be like - kind , which means they are of the same character or nature, even if they differ in grade or quality. There is a great deal of flexibility within this definition.

The IRS is less inclined to state that one type of personal property qualifies as like - kind for other personal property.

For example, personal property may be characterized as depreciable tangible property, intangible property and non-depreciable personal property. The first provision of a federal tax code permitting non-recognition of gain in an exchange was Code Sec. If, as part of the like - kind exchange , you also receive other (not like - kind ) property or money, gain is recognized to the extent of the other property and. Keep in mind that one of the justifications for tax deferral is that a taxpayer has reported all the incidences of ownership and that the taxpayer’s basis will carry over into the new replacement property.

And that is typically what is done. They need only have a similar nature or character, which primarily means that they are investment properties. For example, when raw land is traded for a small retail center, capital gain taxes can be avoide and the investor will also reap the benefits of owning a property that will generate increased cash flow. However, bear in mind that there are several like - kind exchange rules that must be followed to complete a valid exchange.

The use of a qualified intermediary can facilitate the exchange using escrow accounts. This type of qualified intermediary promises to return the proceeds of the exchange to the transferor of the property.