The most common type of 1031 Exchange is used for real estate, likely due to the broad definition of what is considered “like-kind” for Real Estate (or Real Property) Exchanges. In general, any type of U.S. real property held by the client for productive use in a trade or business, or for investment purposes can be exchanged for more real property as long as the properties are of “like-kind”, regardless of grade or quality. The below is a list of properties that are deemed to be of “like-kind”:
For most Real Estate Exchanges, the taxable gain is due to a combination of the appreciation in value and the amount of depreciation taken over the period of time that it was owned by the client. Many investors like to see what kind of tax savings they can benefit from when they sell their investment property. Below is an example which outlines the sale of an apartment building and a purchase of an office building with and without the use of a 1031 Exchange. As you can see, with using the 1031 Exchange the investor benefits from a huge tax deferral. It’s like a “tax free loan from the government” when using a 1031 Exchange creating a stronger buyer position for the purchase.