Interpreting what is like-kind - by Patrica Flowers

Patricia Flowers, Investment Property Exchange Services

Many things are open to interpretation, so when hearing the terms “exchange” and “like-kind,” certain assumptions may be incorrect. One of the more common is: “I am selling an office building so I have to look for replacement property that is an office building because of the “like-kind” requirement.”

For real property transactions (rental units, office buildings, strip malls, land, etc.) the “like-kind” requirement does not mean selling and buying the exact same type of property. 1031 exchanges are often called “like-kind exchanges” because that is the language used in the tax code. However, the IRS takes a very broad view of this in the case of real property. The regulations state that “all real property is like-kind to all other real property,” so it is really not about what it looks like, it’s grade or quality, but more like-kind in how it is used, for income or investment purposes.

For example, you can sell land and purchase a multi-family rental or sell an apartment building and purchase commercial. Surprisingly, fee simple interest in real estate is like-kind to a 30-year leasehold or a tenant-in-common interest in real estate. All great ways to diversify a portfolio!

However the “like-kind” definition for equipment /personal property is not as flexible. The regulations for personal property such as machinery, business vehicles, fishing vessels, artwork, etc. are far more restrictive and need to be reviewed case by case to be sure the items are of like-kind (i.e. a crane for a crane or a painting for a painting) or like-class. The “like-class” distinction applies to tangible, depreciable business use assets that are included within the same general asset class or product class. This allows a 1031 Exchange of an airplane for a helicopter, or a bulldozer for a backhoe or other item of construction machinery and equipment.

“Like-kind” exchanges continue to offer both real and personal property owners a great opportunity to move assets and reinvest their equity.

Patricia Flowers is VP for Investment Property Exchange Services (IPX1031), Boston.