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1031 exchange , What is Like-Kind Property?

Like Kind as it appears in the IRC (Internal Revenue Code) related to 1031 Tax Deferred Exchanges (& 1033 Involuntary Conversions which I will not be getting into today) really means four things:

Location of Property: To be like kind to another property; both have to be "located" in the United States or Both have to be out side of the United States. (New York for Florida is OK, but NY for Canada is not).

Type of Property: Real Property for real property is fine, and the level of improvements on each property is immaterial. (vacant land for apartment building is ok). The like-kind exchange for personal property is much more strict and no need to get into that in a real estate blog (but check with a qualified intermediary if you are trading a backhoe for other equipment).

Use of Property: Both properties must be used by the taxpayer in a trade, business or for investment. Many of the restriction reviewed in the past were found to have personal purposes, for example a residence, vacation home or a personal automobile. This category offers the most concern and the use of the relinquished property should be looked at carefully prior to an exchange (seek advice from a qualified intermediary).

Value of Property:  Like-kind must match one another , if the prices of the two properties don't match to the extent there is a disparity, then property of an unlike kind will be subject to tax (this property is termed Boot). So the goal is to even or up your value in an exchange.

In order to avoid some of the well know pit falls or mistakes in a Like-Kind exchange follow these simple rules: Both properties must be in the United States, Both have to be the same type, Both have been used as the Taxpayer's investment (trade/ business) and both have to be comparably valued. These are the basic (somewhat simplified) elements for a successfully structured 1031 tax deferred exchange.

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26 commentsSteve Loynd • June 06 2008 12:12PM
1031 exchange What is Like-Kind Property?
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Like Kind as it appears in the IRC (Internal Revenue Code) related to 1031 Tax Deferred Exchanges (& 1033 Involuntary Conversions which I will not be getting into today) really means four things: Location of Property: To be like kind to… more