The 1031 Exchange “Like-Kind” Requirement

The 1031 Exchange “Like-Kind” Requirement

At Inco, we’ve aimed to enhance your 1031 Exchange acumen through a series of articles detailing the entire process. Through these efforts, we’ve brought our investor’s attention to key terms and timelines, including the history of this section in the tax code.

The reason behind our approach is simple: providing clients with a clearer understanding of investment options aids better decision making. After all, we are talking about your hard earned dollars — so why take unnecessary risks?

In the present installment, we underscore the importance of knowing another key concept, the “like-kind” requirement, because a thorough understanding of it can make all the difference.

What Property Qualifies for Like-Kind Exchange?

When considering a 1031 Exchange, it’s important that you first understand the “like-kind” qualification, which states that the property you’re exchanging for must be of the same nature, character or class of the property you’re selling. What this effectively means is that the two properties must also be of “equal or greater value” (debt and equity).

These requirements can be fulfilled (most simply) by performing a simultaneous swap of one property for another. Furthermore, both of the properties (i.e. the one you’re exchanging and exchanging for) must be held for use in a trade or business or for investment purposes.

What this means is that any property used primarily for personal use, such as an investor’s personal residence or second home / vacation home, would not qualify for like-kind exchange treatment.

Real vs. Personal Property

1031 Exchanges aren’t limited to real property; in fact, personal property can also qualify as an exchange property, under Section 1031 of the U.S. tax code.

Just remember that real property is never considered “like-kind” to personal property; in other words, you can’t exchange a car for a home. Moreover, when it comes to personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property.  As a practical example, a car cannot be considered as a like-kind to a truck, and therefore, you can’t exchange the two.

Property Excluded From 1031 Treatment

In addition to understanding the types of property that qualify for like-kind exchange and the distinction between real and personal property, we recommend that our clients know the property types that are excluded from 1031 treatment.

Here’s a helpful list of assets / property types that cannot be applied to a 1031 Exchange:

  • Inventory or stock in trade
  • Stocks, bonds, or notes
  • Other securities or debt
  • Partnership interests
  • Certificates of trust

What Comes Next?

We hope that this information has augmented your understanding of the 1031 Exchange’s like-kind requirement. If you have additional questions or would like to discuss the details further, give us a call today at (562) 296-1362.