What is Like-Kind Property?

Mortgage and Lending with Investment Properties
We all know the reason you are here. You want to answer your question of, “what is like-kind property?” Well, this is nothing like beginner home improvement projects. A like-kind property refers to a pair of real estate assets of a similar nature. This is regardless of quality or grade that can be exchanged without attracting any tax liability. The IRC (Internal Revenue Code) defines it as any real estate asset that is held for business, trade, or investment purposes under Section 1031 of the Internal Tax Code, qualifying them as a 1031 exchange. This ensures that both properties listed and involved in the business are either for investment or business purposes. Personal residences don't fall under this category as they are not like-kind properties. So what is like-kind property?
Understanding What Like-Kind Property Is
Businesses or individuals that possess investment or business properties can exchange them using a like-kind exchange. This exchange is known as the 1031 exchange under Section 1031 of the U.S. Tax Code or tax-deferred exchange, also known as 1031 exchange for commercial property. This allows the seller to avoid payment of capital gains on the exchange. Section 1031 of the Tax Code allows the deferment of taxes due when business or investment properties are sold to raise cash for reinvestment in other properties.
However, the like-kind property must meet the requirements set out by the Internal Revenue Service (IRS) before it is accepted as a Section 1031 transfer. To fulfill the requirements for a tax deferral, the like-kind properties must be exchanged instead of sold out directly.
What is Like-Kind Property?
What is Like-Kind Property?
Other requirements also include that the like-kind property must be within the U.S. to qualify. So, the proceeds from selling a hotel in the U.S. cannot be used to buy a hotel in Dubai and defer capital gains. Partnership interests, bonds, stocks, securities, and other financial assets are exempted from tax deferrals as they are not considered like-kind properties.
Securities, stocks, bonds, partnership interests, and other financial assets are excluded from the definition of what like-kind property is.
Forms of Like-kind Exchange
· Simultaneous exchange - Here, the two properties can be exchanged the same day.
· Deferred exchange - Here, one party has 180 days to finalize the exchange after it has begun. The purchase must be completed within the 180 days timeframe or the due date for the tax return that year.
Like-kind properties do not have to be the same type or size to qualify. They do not even need to have the same roof material. They could be of different assets that can be exchanged as long as they are eligible for it under the IRC. You could even try out some exterior home remodel ideas before looking into any exchanges. Principal or primary residences that are mostly used for personal purposes do not qualify and cannot be used as an exchange. The primary criteria to qualify is that the properties must be held for investment or business purposes. Here are some like-kind property that can be exchanged;
· Hotel for retail property,
· Apartment building for a shopping center,
· Industrial building multifamily property,
· Vacant lot for a medical complex,
· Condominium rental for single-family rental.
Before 2017, like-kind property exchange involved all kinds of assets, from cryptocurrency holdings and art to machinery, equipment, and cars. However, the Tax Cuts and Jobs Act that was passed in December 2017 totally removed everything except real estates held for investments, trades, or businesses.
What Qualifies As Like Kind Property?
What Qualifies As Like Kind Property?
Related Terms
Reverse Exchange - This is a property exchange type where the replacement property is acquired before the current property is traded.
Qualified Exchange Accommodation Arrangements - This is a tax strategy where the third party holds the relinquished or replacement property of the real estate investor.
Like-Kind Exchange - This is a tax-deferred transaction that allows for asset disposal and the acquisition of a similar asset.
UPREIT Definition - This is a way to defer capital gains tax liability when a company or individual plans on selling appreciated real estate.
Residential Rental Property - This is an investment property type that derives more than 80% of revenue from its dwelling units.
We hope this helps you in your journey of selling investment property or even selling rental property. Keep in mind the answer to, “what is like-kind property” when you go to sell investment properties.

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