While earnings generated from the sale of a business property are generally assessed at the time of the sale, there are several tools available for businesses hoping to defer their tax obligation.
One of the most common is a “like-kind exchange” under Section 1031 of the Internal Revenue Code. In basic terms, a like-kind exchange allows businesses to postpone paying tax on the gain if they reinvest the proceeds in similar property.
Of course, there are a number of requirements that must be satisfied in order to qualify as a like-kind exchange. This post addresses one of the most important questions—are your assets considered like-kind?
Both the relinquished property you sell and the replacement property you buy must meet certain criteria. First, they must both be held for use in a trade or business or for investment. Second, both properties must be similar enough to qualify as "like-kind," meaning they are of the same nature, character, or class.
With some exceptions, most real estate will be like-kind to other real estate. One notable exception is that domestic property cannot be exchanged for non-domestic property.
While real property and personal property can both qualify under Section 1031, it is important to note that real property can never be like-kind to personal property. In addition, the rules for determining whether personal property qualifies as "like-kind" are much more restrictive. For instance, cars are not considered like-kind to trucks.
Finally, certain types of property are specifically excluded. Section 1031 does not apply to exchanges of:
- Inventory or stock in trade
- Stocks, bonds, or notes
- Other securities or debt
- Partnership interests
- Certificates of trust
Of course, this post provides only a brief overview of 1031 like-kind exchanges. We also caution our readers about sale pitches and other scams that promote improper use of like-kind exchanges. In order to complete a successful like-kind exchange transaction, we recommend consulting with our experienced attorneys about both the business and tax implications.