What is Like-Kind Real Estate?

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A 1031 exchange is a valuable tax deferral strategy that allows an investor to sell a business or investment property and replace it with another “like-kind” property. Instead of paying capital gains taxes on the sale, the investor is allowed to use the funds to acquire new property and defer the taxes to a future date. In effect, an investor receives a tax-free loan from the federal government to be used for the purchase of an additional income-generating property.

Certain IRS requirements must be met in order to take advantage of this wealth-preserving, income-producing benefit. The direct sale of property and the subsequent purchase of another investment property doesn't qualify for tax deferral because a sale has taken place – not an exchange.

Definition of Like-Kind Real Estate

Income Revenue Code 1031(a) defines like-kind properties as those that have been held for productive use in a business, trade, or as an investment. Like-kind, as used in this code, means a property that is similar in nature or character, regardless of differences in grade or quality.

Types of Like-Kind Real Estate

Both the relinquished property that is sold and the new replacement property must be qualified properties. This means that an investor can't sell his personal residence and expect 1031 tax deferral benefits. A property that has been used in a taxpayer’s business or trade, such as a place of business or an office facility, is considered a qualified property. The following are examples of qualified 1031 like-kind properties and like-kind exchanges:

  • A hotel for an office building.
  • Commercial property for unimproved property.
  • An industrial building for a multifamily property.
  • An office building for a shopping center.
  • A condo unit for a warehouse.
  • A farm or ranch for an apartment building.
  • A duplex for a Tenant In Common investment.

Using Land as Like-Kind Real Estate

In addition, unimproved raw land held for investment purposes can be exchanged for a rental investment property. Here are some examples:

  • A shopping center for raw land.
  • Undeveloped land for an industrial building.

Whether the land is productive, improved or unimproved isn't relevant as long as it has been held as an investment. Any mixture of office buildings, parking lots, apartment buildings, shopping centers, retail stores, hotels, motels, farms, and ranches or unimproved land may be exchanged. Exchanges under the 1031 IRS code are limited to property in the United States; exchanges into foreign property was disallowed in 1989. A vacation home or second home that isn't held as a rental usually does not qualify for a 1031 exchange.

If specific IRS rules are followed, a 1031 exchange can help a taxpayer build and preserve wealth and assets, generate cash from the investment, diversify, restructure and consolidate real estate holdings.


Securities offered through Pacific West Securities, Inc. Member FINRA/SIPC. This material is neither an offer to sell nor the solicitation to purchase any security. The information is for discussion and information purposes only. It is not intended to replace competent legal, tax or financial planning advice. The applicable tax codes apply to and relate to federal law only. Individual states may have their own additional tax codes. Please contact the appropriate tax and legal professional in your state. This information is provided from sources believed to be reliable but should be used in conjunction with professional advice that is consistent with your personal situation.