Like-Kind Exchange – Definition & Explanation

Like-Kind Exchange Definition

Like-Kind Exchange, also known as a “1031 Exchange” or “Starker Exchange”, is a tax-deferred business transaction. It allows the seller of real property to avoid recognizing taxable gain when selling the property. To qualify for the tax exemption, the seller must either swap the sold property for a similar type of commercial or investment property or use the proceeds from the sale to purchase a similar property – within a statutorily specified time frame.

A Little More on What is a Like-Kind Exchange

A like-kind exchange is authorized for tax exemption under Section 1031 of the Internal Revenue Code. Since 2017, it applies only to the sale of commercial or investment property. The objective of the rule is to allow holders of these types of assets to swap or sell the asset and acquire similar property without having to pay taxes on the capital gains (the amount of the sale price beyond the purchase price). It also allows for the deferral of recognition on the recapture of gain.

To qualify for this tax-exemption, the transaction must meet the following characteristics:

  • The real property sold must be business property or an investment property (i.e., it  cannot be a personal residence).
  • The proceeds must be used to purchase business or investment property.
  • The seller has 45 days from the date of sale to identify a similar property to purchase and a maximum of 180 days of the sale to complete the purchase.
  • The seller must complete IRS Form 8824 describing the terms of the deal.
  • If any boot is received, the seller must report the gain on Form 8949, Form 1040, or Form 4797, depending on who and how the property is held.

References for “Like-Kind Exchange

https://www.investopedia.com/terms/l/like-kind_exchange.asp

https://en.wikipedia.org/wiki/Like-kind_exchange

https://www.accruit.com/services/like-kind-exchange/like-kind-exchange-requirements

https://investinganswers.com/dictionary/k/kind-exchange

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