Deferring taxes is important, but it is equally important to make sure you purchase replacement property that suits your investment needs, management requirements, and investment time horizon. In addition to these factors, your replacement property must meet the IRS “like kind” guidelines for replacement property.
But what exactly does that mean?
The IRS defines like-kind as any property held for business or investment purposes. Here’s an important detail: “Like-kind” does NOT refer to the type of property, it refers to the use of the property. So, any property that is to be held for business or investment use can qualify as replacement property. This means that a single family rental can be exchanged for farmland, a vacant lot can be exchanged for an apartment building, etc.
Property that will not qualify as “like kind” would be property that is held for personal use. For instance, a rental property cannot be exchanged for a house the investor intends to live in. Additionally, non-real estate assets like stocks, bonds or even vehicles will not be considered “like kind”. It has to be real estate that is owned for investment and/or business purposes.
One thing people don’t always know is that you can exchange a single property for multiple different properties, or multiple properties for a single property. The properties can all be different types of real estate, as long as they meet the definition of like kind use.Additionally, an investor can exchange into certain types of securitized real estate such as professionally sponsored TIC and DST programs.
With this loose definition, an investor is free to pursue almost any property that meets their investment criteria.
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