iS THE TERM "LIKE-KIND" CONFUSING TO YOU? HERE'S A SIMPLE EXPLANATION

Mar, 2009

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Does it confuse you when you hear that property in an exchange must be exchanged for "like-kind" property? In the talks that I give to real estate agents, investors, attorneys and accountants, I think I've hit on an easy way to determine whether or not the property being sold is like-kind to the property being purchased.

Before getting into the details, let's first establish that virtually all real estate is like-kind to virtually all other real estate. That makes it pretty simple, doesn't it? But there is one major qualifier. Property in an exchange must have been "held as an investment or used in the pursuit of a business or trade." Those words come directly out of Section 1031 of the code.

That qualifier is the basis for my easy way to determine whether or not properties are like-kind. Here's the "secret:" Regarding the property you intend to sell, ask yourself this question:

Did I hold this property as an investment or use it in the pursuit of my business or trade?

If you can honestly answer, "Yes" to that question, then the property will qualify for the exchange. However, that is only half of the battle; the property you intend to purchase must also qualify. In order to determine whether it does, ask yourself this question:

Do I intend to hold this property as an investment or use it in the pursuit of my business or trade?

Again, if you can honestly answer that question, "Yes," then it also qualifies and you have identified like-kind property for your exchange.

EXAMPLE:


like-kind example small.jpg


So, what kind of real estate doesn't qualify as like-kind? The easy answer is "property that hasn't been held as an investment or used in the pursuit of a business or a trade." What that means in English is that if you purchased a property without the intent to hold is as a long-term investment, it does not qualify for an exchange. Property purchased to flip would be an example. Can one's intent change? Yes, but it is up to the exchanger to establish that intent has changed through such things as holding the property out for rent, actually renting it, etc.

In conclusion, if you just remember to ask yourself those two questions, you will know whether or not your properties are like-kind to one another.