A like kind exchange (also known as a “1031 exchange”) is a real estate transaction that allows you to sell a property and reinvest the profits into a new property without paying capital gains taxes.
How does a 1031 exchange work with rental properties?
The intermediary holds the funds after one property is sold in the 1031 exchange and uses that money to buy the new replacement property. When doing a 1031 exchange, the owner must identify the property he is exchanging and declare it before the sale.
Can a rental property be exchanged for a primary home?
The property purchased must be used as a business or investment property; the 1031 exchange of a rental property to a primary residence or second home is not valid.
What does 1031 mean for like kind property?
In a typical IRS qualified §1031 like-kind property exchange, investors defer paying capital gains, depreciation recapture, and income taxes on commercial investment property when it’s sold. Like-kind does not mean identical property, but it certainly excludes (with a twist) exchanges for primary residences.
What are the requirements for a like kind exchange?
Qualifying relinquished and replacement property now must satisfy two core requirements: (1) The property must be real property, and (2) the two types of property must be of like kind to one another. Regs.
What kind of property is eligible for 1031 like-kind exchange?
Generally, rental homes, condo buildings, and apartments are all like-kind, so are eligible for 1031 like-kind exchanges. Such property types are like-kind for two reasons. First, they generate income through lease and rental agreements. Second, they are not owned primarily for personal use.
What do you need to know about like kind property?
Like kind properties are real estate assets that qualify under Section 1031 of the Internal Revenue Code for exchange and for the deferment of capital gains taxes. Like kind properties must be held for business or investment purposes only, not for private use. They do not need to be of similar grade or quality to qualify.
