Like Kind Property Explained

Like kind property is the foundational requirement of a Section 1031 exchange, and the term is far broader for real estate than most investors expect. Since the Tax Cuts and Jobs Act took effect for exchanges completed after December thirty first, two thousand seventeen, like kind exchange treatment under Section 1031 is limited exclusively to real property held for productive use in a trade or business or for investment. Personal property, including equipment, vehicles, machinery, and franchise licenses, no longer qualifies at all, regardless of how the exchange is structured. Within the category of real property, the definition of like kind is generous. The Internal Revenue Service has long held that all real property is like kind to all other real property located within the United States, regardless of grade or quality. This means an investor in Baltimore, MD can exchange raw undeveloped land for an improved office building, a single tenant retail property for a multifamily apartment complex, or an industrial warehouse for a portfolio of medical office suites, and each pairing satisfies the like kind requirement so long as both properties are held for investment or business use rather than personal use. A leasehold interest with a remaining term of thirty years or more is generally treated as like kind to a fee simple interest, which allows certain ground lease structures to qualify. Real property located outside the United States is not like kind to real property located within the United States, so an investor cannot exchange a domestic relinquished property for a foreign replacement property under Section 1031. Property that fails the like kind test in common situations includes an investor's primary residence, a second home used predominantly for personal enjoyment rather than rental, and property held primarily for sale, sometimes called dealer property, such as land held by a developer for subdivision and immediate resale. For investors in Baltimore, MD, the practical takeaway is that the range of eligible replacement property is wide. A relinquished commercial building does not need to be replaced with the same property type, the same tenant mix, or the same geographic market, and shifting from active management, such as a multifamily property, into a more passive holding, such as a single tenant net lease property, remains fully eligible so long as both properties are held for investment or business purposes. We help investors confirm that a candidate replacement property meets the productive use or investment holding requirement before it is added to an identification list, avoiding a costly disqualification discovered after the forty five day deadline has passed.