What are like-kind properties and exchanges? These terms might not be as well known as others in the commercial real estate world, but they are important to know! They could come in handy for your commercial real estate investments, so keep reading for more info!
What are Like-Kind Properties?
Like-kind properties are two real estate assets that have a similar nature that could be exchanged without any tax liabilities. These properties can be considered similar regardless of the quality or grade of the site. In legal terms, the Internal Revenue Code (IRC) defines like-kind properties as any property used as an investment, trade or business purpose under section 1031 of the U.S. tax code.
Since it must be a business, personal residences do not qualify for these types of exchanges. Other financial assets that do not qualify include stocks, bonds, securities, partnership interests and other assets. Properties that do qualify include, multifamily properties, industrial buildings, vacant land, shopping center, apartment building, hotel or condo rental.
Essentially, investors can exchange their investments from one property to another similar property, in order to avoid paying capital gains. These properties must be within the United States to qualify for a like-kind exchange.
Understanding Like-Kind Exchanges Further
We have reviewed some of the stipulations of like-kind exchanges and given examples of acceptable properties, but what does the actual exchange look like? Well, these exchanges can take different forms. One way to exchange is a simultaneous exchange, where the two properties are exchanged within one day. On the other hand, deferred exchanges give the party 180 to finalize the exchange. It is really up to the parties involved and what works for them.
Our own partner, Steve Warwick, is a big fan of like-kind exchanges. He and a family member purchased a commercial property together back in the 19080’s that they rented out to a plumbing company for 6 years. After that, they moved their sales proceeds into some rental properties. Later, they sold the rental properties and moved those proceeds into an office condo project that they still own today. This 1031 like-kind property exchange allowed them to grow their investment and stay active in the market.
Steve said that these exchanges are “used regularly in our local market as well as nationwide by people that invest in the commercial and investment real estate market. By deferring the tax, you can reinvest the entire sales proceeds versus a lesser amount that would remain with after-tax proceeds. … This creates jobs and additional services needed by real estate brokers, banks, surveyors, title companies, lawyers and many others. It is a great avenue to try and grow your investment portfolio.”
As you can see, we are a big fan of like-kind exchanges here at MWM!
If you would like more information about like-kind properties and exchanges or are interested in doing this yourself, contact us and we can help you!