Guides

Like Kind Property Explained

Like kind property is the foundational concept behind a Section 1031 exchange, and the standard for real property is generally broader than many investors expect. Following the Tax Cuts and Jobs Act, Section 1031 like kind treatment is limited to real property held for investment or business use. Personal property and intangible business assets that once qualified under prior law are generally no longer eligible for like kind exchange treatment. For real property, the like kind standard focuses on the nature or character of the property rather than its grade, quality, or specific use. In practical terms, this generally means an investor selling an apartment community in Dallas, TX can typically acquire industrial, retail, office, land, or even a different property type such as self storage or a ranch tract, as long as both the relinquished and replacement property are real property held for investment or business purposes rather than a personal residence. Raw land can generally be exchanged for improved property, and vice versa, because both are real property, even though their improvement levels differ substantially. Fractional interests such as tenant in common structures, and increasingly Delaware Statutory Trust interests structured to be treated as direct property interests under Revenue Ruling 2004 86, are also generally treated as like kind real property for exchange purposes, though these interests may be securities subject to separate regulatory considerations. Certain leasehold interests with thirty years or more remaining, including renewal options, have also generally been treated as like kind to a fee interest. Investors evaluating a swap from Dallas Fort Worth commercial property into a different asset class or geography should understand that the flexibility built into the like kind standard for real property is one of the features that makes diversified replacement strategies possible. This page provides a general overview only and does not address every fact pattern that can affect like kind qualification for a specific property. Investors sometimes assume international property could substitute for a domestic replacement, but real property located outside the United States is generally not treated as like kind to real property located within the United States, which is a distinction worth confirming early when a portfolio includes cross border holdings.