1031 Like-Kind Exchange- What Does That Mean?

Like-Kind Exchanges (LKEs) are tax-advantaged vehicles that provide an efficient way to defer the tax on gains from the sale of real or personal property when replaced with Like-Kind property. Internal Revenue Code Section 1031offers a “safe harbor” to taxpayers (Exchangors) that use a Qualified Intermediary (QI). A QI is an independent third party charged with holding the Exchangor’s funds during the period between disposition of property (Relinquished Property) and acquisition of property (Replacement Property).

Exchange Rules

  • The rules for an LKE are straightforward and very important. A valid LKE requires in part that:
  • The property must held be for investment purposes or for productive use in business. Therefore, LKE treatment is not available to dealers selling inventory.
  • The Exchangor may not receive the cash proceeds from the sale. To avoid actual or constructive receipt, funds are held in an exchange account during the exchange period.
  • Legal documents required include an Exchange Agreement as well as certain assignments and notices prior to closing.
  • To fully defer the capital gains tax or recapture, the Replacement Property should be of equal or greater value to the Relinquished Property and have equal or greater equity and debt.
  • The Exchangor, within 45 calendar days from the disposition of the Relinquished Property, must clearly and unambiguously identify up to three potential Replacement Properties.
  • The Exchangor may identify more than three properties so long as their combined fair market value does not exceed 200% of the value of the Relinquished Property.
  • The Exchangor may exceed the 200% limitation, only if it then acquires 95% of the fair market value of the properties identified to fulfill the requirements of Section 1031.
  • Within 180 calendar days from the date of the transfer of the Relinquished Property, the Exchangor must acquire one or more identified Replacement Properties.
  • Each Replacement Property must be “Like-Kind” to the Relinquished Property. In general, real property held for investment purposes or for productive use in business is like-kind to other real property.‚Äč

For more specifics on 1031 Like-Kind Exchanges, please speak with your accountant. Its very important to speak with your accountant for any major financial decisions.