Like-Kind Property

Definition of Like-Kind Property

Like-Kind Property refers to assets that are considered to be the same in nature, character, or class, though not necessarily identical in quality or grade. This term is pivotal in real estate and tax law, particularly concerning Section 1031 exchanges. Under this provision of the Internal Revenue Code (IRC), property owners can defer capital gains taxes by exchanging one qualifying property for another of like kind.

Examples of Like-Kind Property

Residential Rental Property and Commercial Property: If you own a residential rental property and exchange it for a commercial property, both are considered like-kind properties under Section 1031.
Raw Land and Improved Land: Exchanging raw land for land that has been developed (improved land) also qualifies as a like-kind exchange.
Office Building and Apartment Complex: An office building can be exchanged for an apartment complex as both fall under the category of real property.
Farm Land and Industrial Property: Land used for farming and industrial properties are considered like-kind despite their different uses.

Frequently Asked Questions (FAQs)

Can personal property qualify as like-kind property?

No, personal property generally does not qualify for like-kind exchanges under current U.S. tax law. The Tax Cuts and Jobs Act (TCJA) of 2017 limited Section 1031 exchanges to real property only.

Are there specific requirements to meet for a like-kind exchange?

Yes, the properties involved must be used for business or investment purposes. Additionally, there are strict timelines to adhere to, including identifying replacement property within 45 days and completing the exchange within 180 days.

Is foreign real estate considered like-kind with U.S. real estate?

No, real estate in the U.S. can only be exchanged for other real estate within the U.S. Properties located outside of the United States do not qualify.

Can I partially receive cash during a like-kind exchange?

Yes, but if you receive cash or other non-like-kind property, it is known as “boot,” and you may have to pay capital gains tax on that portion of the exchange.

Section 1031: A provision of the Internal Revenue Code that allows for the deferral of capital gains taxes on the exchange of like-kind property.
Tax-Free Exchange: Another term for a 1031 exchange where capital gains taxes are deferred.
Boot: Any form of money or non-like-kind property received in a 1031 exchange, which can be taxable.
Qualified Intermediary (QI): A third party who facilitates the 1031 exchange by holding the funds and property titles during the transaction.

Online Resources

References

“Section 1031 - Exchange of Real Property Held for Productive Use or Investment,” Internal Revenue Code.
“A Guide to 1031 Exchanges,” National Association of Realtors.
Clark, G. (2017). “Understanding Section 1031 Or Like-Kind Exchanges.” Journal of Real Estate Taxation.

Suggested Books for Further Studies

Aggrey, J., & Perry, G. (2018). The 1031 Exchange Handbook.
Evans, R. (2008). Get Dtaxed: A Simple Accounting of the Premium Savings.
Pittman, A. (2011). Complete Guide to Section 1031 Real Estate Exchanges.

Real Estate Basics: Like-Kind Property Fundamentals Quiz

### Which statute allows for the exchange of like-kind property without immediate capital gains tax consequences? - [ ] Section 501 - [ ] Section 1032 - [x] Section 1031 - [ ] Section 1040 > **Explanation:** Section 1031 of the Internal Revenue Code allows for the deferral of capital gains taxes on the exchange of like-kind properties used for business or investment purposes. ### What type of property is not included under the like-kind exchange rules post-2017 TCJA? - [ ] Commercial property - [x] Personal property - [ ] Residential rental property - [ ] Raw land > **Explanation:** Post the Tax Cuts and Jobs Act (TCJA) of 2017, like-kind exchange rules are limited to real property, excluding personal property from these transactions. ### Strict timelines for like-kind exchanges mandate that a replacement property must be identified within how many days? - [ ] 30 days - [x] 45 days - [ ] 60 days - [ ] 90 days > **Explanation:** The replacement property must be identified within 45 days of the sale of the relinquished property. ### What must be the predominant use of properties involved in a like-kind exchange? - [ ] For residential purposes - [x] For business or investment purposes - [ ] For charitable purposes - [ ] For recreational purposes > **Explanation:** Properties involved in a like-kind exchange must be used for business or investment purposes. ### In a like-kind exchange, receiving cash or non-like-kind property may result in recognizing a taxable gain known as what? - [ ] Bonus - [x] Boot - [ ] Gift - [ ] Premium > **Explanation:** Receiving cash or other non-like-kind property is termed "boot" and may result in recognizing a taxable gain. ### Which entity typically facilitates a 1031 exchange by acting as a third party to hold the proceeds and title? - [ ] Real estate agent - [ ] IRS official - [ ] Lawyer - [x] Qualified Intermediary (QI) > **Explanation:** A Qualified Intermediary (QI) facilitates the 1031 exchange by holding the funds and property titles during the transaction. ### True or False: Property in France can be exchanged for property in the US under Section 1031. - [ ] True - [x] False > **Explanation:** Property in the United States can only be exchanged for other property also located within the United States. Properties located outside of the U.S. do not qualify for Section 1031 exchanges. ### For a 1031 exchange, what is the maximum period within which the entire transaction must be completed? - [ ] 90 days - [ ] 120 days - [x] 180 days - [ ] 365 days > **Explanation:** The entire transaction of a 1031 exchange must be completed within 180 days from the sale of the original property. ### What type of properties does Section 1031 apply to? - [ ] Single-family homes for personal use - [x] Business or investment properties - [ ] Personal vehicles - [ ] Collectibles > **Explanation:** Section 1031 applies to properties held for business or investment purposes, not personal use properties like single-family homes. ### Before the TCJA, what type of asset was commonly included in like-kind exchanges but excluded afterwards? - [ ] Farmland - [ ] Industrial warehouse - [x] Personal property, such as equipment - [ ] Multi-family apartments > **Explanation:** Before the enactment of the TCJA of 2017, personal property such as equipment was included in like-kind exchanges, but it has been excluded since.