Like-Kind Property and Section 1031 Exchanges

Like-kind property refers to real estate held for business or investment that can be exchanged for other qualifying real estate without immediate recognition of capital gains under Internal Revenue Code Section 1031. These exchanges defer tax liability when done according to IRS rules.

What qualifies as like-kind property

• Must be real property held for business, trade, or investment purposes.
• Personal residences do not qualify.
• Securities, stocks, bonds, partnership interests and similar financial assets are excluded.
• For U.S. taxpayers, replacement property generally must be U.S. real estate to qualify for deferral.
• Properties do not need to be identical in type, grade, or quality—only both must meet the business/investment requirement.

How a 1031 exchange works

A 1031 exchange allows a taxpayer to defer capital gains tax by exchanging one qualifying property for another. The basic principles:
* The transaction must be structured as an exchange rather than a simple sale and purchase.
Common exchange formats:
* Simultaneous exchange — both properties change hands on the same day.
* Deferred exchange — the taxpayer transfers the relinquished property, then identifies and acquires replacement property within IRS time limits.
Timing rules for deferred exchanges:
* 45 days from transfer of the relinquished property to identify potential replacement property(ies).
* 180 days from the transfer to complete acquisition of the replacement property(ies).
* To avoid constructive receipt of sale proceeds, taxpayers typically use a qualified intermediary (a 1031 exchange company) to handle proceeds and documentation.

Typical examples

Like-kind exchanges can swap dissimilar types of real estate, for example:
* A multifamily apartment building for an industrial building
Vacant land for a medical complex
An apartment building for a shopping center
A hotel for retail property
A condominium rental for a single-family rental

Special considerations

• The Tax Cuts and Jobs Act (2017) limited 1031 exchanges to real property; personal property exchanges that used to qualify no longer do.
• 1031 exchanges are complex and subject to strict procedural and timing rules; errors can produce taxable events.
• Working with experienced tax and exchange professionals (qualified intermediaries, CPAs, or real estate attorneys) reduces risk and helps ensure compliance.
• Rules can vary in special situations (reverse exchanges, improvement exchanges); consult a professional for these structures.

Key takeaways

• Section 1031 permits tax-deferral for exchanges of like-kind real estate held for business or investment.
• Primary residences and most financial assets are excluded.
• The deferred-exchange timeline is strict: 45 days to identify and 180 days to close.
• Use qualified intermediaries and professional advisors to navigate the process and avoid costly mistakes.