What is a “Like-Kind” Property?

In a like-kind exchange, property owners can defer paying capital gains on the sale of their properties. This is possible because they have to swap with another party’s qualifying business or investment property and it must meet certain requirements set out by the IRS in order for this tax treatment to be given. In short, there cannot be a direct sell off of these assets through one single transaction—rather, an indirect method that involves a qualified 1031 intermediary, who will hold the funds in escrow before you use them to purchase your next property. The money can not commingle with your personal funds at any point, or the exchange becomes invalid, and taxes become due. The timeline for a 1031 exchange is also very strict. For example, when an individual sells a commercial space, they must identify a replacement property within 45 days. After the identification period has passed, they must close on one or more of those identified properties within 180 days. It’s important to note that like-kind exchanges are not limited by the size of the property, rather they’re judged on how much income it might generate or what could be built there in the future if something were demolished and replaced with something new. An apartment complex valued at $200K can be exchanged for a shopping center valued at $200K, if the like-kind replacement property is of equal or greater value. Some examples of like-kind properties that can be exchanged include:

• A multifamily property for a Hotel.
• Raw Land for a medical complex.
• An apartment building for an office building.
• An Industrial Building for a retail property.
• A single family home rental for a flex space industrial rental.

**Personal residences NEVER qualify for a like-kind property. Bottom-line is, there is a lot of management that goes into a 1031 exchange, and identifying “like-kind” properties. Please contact your accountant, your lawyer, and your real estate professional to make sure you’ve covered your bases ahead of time. If you have more questions about a 1031 exchange, or any other commercial real estate transaction or investment question, reach out to Jody Jones with Align Commercial Real Estate in Salt Lake City, Utah. She has been helping commercial business owners with this process since 2015. Call her today at 801-577-2175. She can help you plan ahead so you are prepared come tax time.