The term “Like-Kind” refers to a type of investment or business asset that can be exchanged without triggering a taxable event. The 1031 exchange, named after Section 1031 of the U.S. Internal Revenue Code, allows the owner of an investment or business property to exchange it for another “like-kind” property and defer capital gains taxes that would otherwise be owed on the sale.
“Like-Kind” property doesn’t have to be exactly the same type, but it does have to be similar in nature, character, or class. The rules for what qualifies as “like-kind” can be quite broad, and it typically encompasses real estate exchanges where the properties are held for business or investment purposes.
For example, you could exchange a commercial building for a residential rental property or raw land for an industrial building, and those could be considered “like-kind” exchanges under Section 1031. However, there are specific rules and guidelines that must be followed, including certain timelines for identifying and closing on the new property, so consulting with a tax professional experienced in 1031 exchanges is often essential.