What is Considered Like-Kind Property in a 1031 Exchange? by Christopher Sanz, JD, LLM

Posted on October 15, 2020

Section 1031 of the tax code provides commercial real estate investors with an opportunity to defer capital gains tax on the sale of appreciated real property when they reinvest sales proceeds into “like-kind” business or investment property. But what is considered like-kind property?

For tax years beginning in 2018, like-kind properties are limited to improved or unimproved U.S. real estate used in a trade or business or held for investment purposes, regardless of whether the properties differ in grade or quality. This means that taxpayers must first consider their purpose and intent for holding the property. Aside from that, the IRS takes a fairly liberal interpretation of like-kind property to include properties of the same nature. For example, investors may exchange an apartment building in one state for a shopping center in another state, or for a vacant lot, unimproved raw land or several industrial warehouses, provided the replacement property is of equal or greater value than the relinquished property. If replacement property is of less value than the property sold, the investor is responsible for paying tax on the difference.

Because the tax laws are complex and constantly evolving, it is important that commercial property investor work with professional advisors with experience in facilitating and closing 1031 exchanges within the time constraints allowable under the law.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.