What are “Like Kind” Properties in 1031 Exchanges

The Big Picture

Section 1031 exchanges help real property owners defer taxes on the sale of business or investment real estate by reinvesting in “like-kind” property. There is a great deal of confusion about what constitutes like-kind property. The term is much broader than what is commonly thought.

Why It Matters

This matters because many people fail to take advantage of the tremendous benefits that Section 1031 offers. These benefits include building greater wealth, deferring taxes interest-free, using leverage to buy more real estate, diversifying among different property types across the entire United States, increasing cash flow by purchasing liquid real estate interests, reducing time and trouble by converting to passive real estate, and enlarging one’s probate estate by bequeathing property on a stepped-up basis.

Many people avail themselves of some or all of these benefits when they learn how broad their options are. Real property held for investment can be exchanged for real property used in a trade or business, just as real property held for use in a trade or business can be exchanged for real property held for investment. In fact, all the following properties are “like-kind” to each other:

• Urban real property
• Rural real property
• Single-family rentals
• Multi-family rentals
• Farm Land
• A Leasehold with 30 or more years to run
• Undivided interests in real property
• Conservation easements
• Cooperative apartments (co-ops)
• Oil, Gas and Other Minerals
• Permanent Easements
• Water rights that are perpetual and considered real property under state law
• Delaware Statutory Trusts and Tenant in Common interests
• Warehouses
• Office buildings
• Land trusts
• Shopping centers
• Vacant land held for appreciation
• Improvements placed on an affiliate’s property
• Business or investment portions of land that is also used as a primary residence
• Etc.

The Takeaway

Perhaps the biggest surprise among real estate investors is the breadth of options available for cash-flowing, passive real estate that qualifies under the “like-kind” label under Section 1031 of the US Tax Code.  Many of such investors choose one of these options as either their sole replacement property or as diversification among several properties.