What Qualifies As Like-Kind Realty Under Irc Section 1031?

Qualifying property is broadly defined, for both the relinquished and replacement property: real estate used for investment or business purposes.

Consequently, investment real estate (held for either appreciation or rental) can be exchanged for real property used in a trade or business. Partial interests such as TICs, DSTs, conservation easements, and perpetual mineral or oil rights are exchangeable with other types of real property (including a land contract in which equitable title has been transferred). Even properties with 30 years remaining on the lease can be exchanged for a fee-simple interest in real estate.

If a non-like-kind property is received (including any debt relief at the end of the exchange), there will be partial gain recognition; there is no all-or-nothing requirement of rolling over all of the equity and existing debt to the replacement realty.

In contrast, the standard for replacement property from an involuntary conversion under IRC section 1033 is a much narrower one: like-use. This means that if a restaurant is destroyed by fire, the insurance proceeds must be used to purchase or build another one. An involuntary conversion as a result of an eminent domain proceeding under IRC 1033(g), however, is an exception to this section’s like-use requirement and uses a like-kind standard similar to section 1031.

This postponement of tax can be continued with successive exchanges (stemming from the original property that was relinquished). This postponement will become a cancellation of the gain to the extent of the step-up in basis received by the heirs at death for property held in the decedent’s name.