Know Your Facts
What is 1031
A sale, exchange or other disposition of property under normal circumstances is a taxable event. With the seller paying taxes on the difference between the selling price and the purchase price less the depreciation and other deductions.
Section 1031 of the Internal Revenue code, however, contains an exception for exchanges of business or investment property "of like kind", without a tax on the transaction.
Tax-free trades are most commonly used with real estate in order not to trigger high taxable gains.
The definition of "like kind" is very broad. According to IRS regulations, it means property of the same character or nature, not just the same grade or quality. Any kind of real estate can be exchanged for another. A warehouse for an apartment building, farmland for offices.
This sounds fairly easy but only in theory.
How often will someone find someone else with another property of "like kind" who is willing to trade?
To make the concept practical, the tax law allows for three-way exchanges. This is where Metro Exchange Incorporated serves as the necessary intermediary allowing you to take advantage of this tax strategy.
Like-Kind Property
Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality.
Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States.
Related Topics
Real Estate Tax Center
Tax Tips - Real Estate
Real Estate Tax Tips
Like-Kind Exchanges
Like-kind exchanges -- when you exchange real property used for business or held as an investment solely for other business or investment property that is the same type or “like-kind” -- have long been permitted under the Internal Revenue Code. Generally, if you make a like-kind exchange, you are not required to recognize a gain or loss under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, you must recognize a gain to the extent of the other property and money received. You can’t recognize a loss.
Under the Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange. A transition rule in the new law provides that Section 1031 applies to a qualifying exchange of personal or intangible property if the taxpayer disposed of the exchanged property on or before December 31, 2017, or received replacement property on or before that date.
Thus, effective January 1, 2018, exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets generally do not qualify for non-recognition of gain or loss as like-kind exchanges. However, certain exchanges of mutual ditch, reservoir or irrigation stock are still eligible for non-recognition of gain or loss as like-kind exchanges.
Like-Kind Property
Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality.
Real properties generally are of like-kind, regardless of whether they’re improved or unimproved. For example, an apartment building would generally be like-kind to another apartment building. However, real property in the United States is not like-kind to real property outside the United States.