Useful Knowledge About Like-Kind Real Estate Exchanges
Despite its many years of use and increasing popularity, many property owners continue to be confused about the concept of “like-kind” relative to the 1031 tax-deferred exchange rules. Here is a helpful explanation.
Basically, a 1031 tax-deferred exchange, also known as a like-kind exchange, allows a taxpayer to defer capital gains taxes when they exchange one investment property for another. To qualify for a 1031 exchange, the properties involved must meet certain criteria, and there is a two-pronged test that these properties must satisfy:
1) Like-Kind Property Requirement: The properties being exchanged must be of “like kind.” This does not mean that the properties have to be identical; instead, they must be of the same nature or character. In other words, both the relinquished property (the property one is selling) and the replacement property (the property one is purchasing) must be real estate used for business or investment purposes. For example, one can exchange a rental apartment building for a shopping center or vacant land for a commercial office building. However, exchanging real estate for personal property, such as a car or furniture, does not qualify.
2) Qualified Use Requirement: Both the relinquished property and the replacement property must be held for a qualified use. This means that they must be used for business or investment purposes, not for personal use or as a primary residence. Additionally, there are timing requirements. One must identify the potential replacement property to be purchased within 45 days of selling the relinquished property, then complete the exchange and acquire the replacement property within 180 days from the sale of the relinquished property.
The rules and regulations surrounding 1031 exchanges can be complex, so it’s advisable to consult with a qualified tax professional or attorney with expertise in this area to ensure compliance with all requirements, as one seemingly minor mistake can disqualify the entire 1031 exchange transaction. For additional information about this and other real estate transaction strategies, please contact the professionals of the Jay Nuss Realty Group at 781.848.9400.