Breaking Down "Like-Kind" In a 1031 Exchange

A successful #1031 exchange can offer powerful tax-deferral benefits to an investor. However, whether an exchange is successful depends on whether it follows the strict rules laid out by the IRS.

One of these requirements is that the relinquished property and replacement property involved in the 1031 exchange is “like-kind.” Which sounds simple, right?

In many transactions, it is. For example, an investor relinquishes one multi-family rental property and replaces it with another multi-family rental property. In this scenario, there is little doubt that the replacement property is similar to the relinquished property.

But are there scenarios where “like-kind” can get more confusing? Absolutely

There are many ways that two seemingly different parcels of real properties can actually be considered “like-kind” for purposes of 1031 exchanges. These include:

• One property can be exchanged for two or more properties
• Multiple properties can be exchanged for a single property
• Investment property can be exchanged for business property, and vice versa.
• Unimproved real estate can be exchanged for improved real estate
• Improved real estate can be exchanged for unimproved real estate
• Full ownership can be exchanged for an undivided percentage interest among multiple owners

However, there are some transactions that do not qualify as “like-kind” for purposes of a 1031 exchange. The biggest issue often involves an investor’s personal residence. Simply put, IRS rules prohibit a personal residence from qualifying for 1031 exchanges under any circumstance.

The IRS is notoriously unforgiving with mistakes. When you are considering a more complicated 1031 exchange, it is important to consult with a professional well-versed in these types of transactions.