One of the most important parts of a 1031 exchange is understanding what “like-kind” actually means. It sounds complicated, but the basic idea is pretty simple: the property you sell and the property you purchase must both be held for investment or business purposes.
The good news is that “like-kind” is broader than many people think. You don’t necessarily have to exchange one type of real estate for the exact same type.
What Counts as Like-Kind?
For example, you may be able to exchange:
- An apartment building for a retail property
- Raw land for an office building
- A rental house for a commercial property
- A warehouse for another investment property
The properties can be very different in their physical characteristics, as long as they meet the requirements for like-kind real property.
What Doesn’t Qualify?
A property generally won’t qualify if it is held primarily for personal use, such as your primary residence. Property held mainly for resale, such as property you purchased as inventory, generally doesn’t qualify either.
The key is how the property is held, rather than simply what type of property it is.
Why Does Like-Kind Matter?
The like-kind rule allows investors to move from one real estate investment to another and possibly defer capital gains taxes by using a 1031 exchange.
If you are considering selling an investment property and buying another, you might want to discuss your plans with a qualified intermediary and your tax advisor before the transaction.
This article is for general educational purposes only and not tax or legal advice. Every 1031 exchange is different so you should consult with your qualified intermediary, tax advisor or legal professional regarding your individual situation.
Related: see the types of properties we handle, including gas stations, shopping centers, farmland, condos, homes and DSTs.