Tax Consequences - Qualifying Transactions

Qualifying Transactions
Under Internal Revenue Code Section 1031, you may not have to pay tax on a gain realized on the exchange of certain properties held either for an investment or for use in a trade or business. These exchanges are typically known as "like-kind exchanges," if the three conditions below are met:

  • The transaction is an exchange.
  • Property is like-kind property.
  • Both property transferred is used for trade, business or for investment.

Qualified exchanges will allow you to defer the gain; however, losses are not deductible unless you give up "unlike" property. The term "like-kind" refers to the nature of the property, not the condition. For example: real estate for real estate, computers for computers and machinery for machinery all qualify. It does not matter as to the condition, age, quality or brand of the property as long as they are from the same type of class. Land trades can be made for other land lots, buildings, farms, real estate and city lots and still maintain the qualified status.

Qualifying Property for the Like-Kind Exchange:

  • Real estate
  • Machinery
  • Equipment
  • Office furniture
  • Computers
  • Most other real and personal property (used for income or investment purposes)

Non-Qualifying Property:

  • Inventory of a business
  • Notes
  • Securities
  • Partnership interest
  • Certificates of trust
  • Foreign real estate
  • Property used for personal purposes
  • Livestock of different sexes
Liabilities & Boot


Related Articles
  1. Active Trading

    Trade Properties To Keep The Taxman At Bay

    Like-kind exchanges can mean a much lower tax bill on real estate for savvy investors.
  2. Investing

    How Does a Tax-Free Exchange Work?

    In regards to the sale of property, particularly in real estate, a 1031 exchange is increasingly being recognized for its tax benefits to investors of all levels.
  3. Taxes

    How To Prevent A Tax Hit When Selling A Rental Property

    Rental property ownership has its benefits but when selling you can face a big tax hit. Thankfully there are ways to reduce your capital gains exposure.
  4. Taxes

    Sell Your Rental Property For A Profit

    Being a landlord can be taxing, especially when you want to sell. Find out how to reduce your burden.
  5. Taxes

    Getting U.S. Tax Deductions On Foreign Real Estate

    If your home or second home is not in the United States, you can still get U.S. tax deductions. How many and what kind depends on whether you also rent it.
  6. Home & Auto

    Flipping Houses: Is It Better Than Buy and Hold?

    Real estate investors can flip a property or use it for cash flow. Find out which will work in your neck of the woods.
  7. Home & Auto

    What You Should Know About Real Estate Valuation

    Anyone involved in a real transaction can benefit from gaining a basic understanding of the different methods of real estate valuation.
  8. Home & Auto

    Investing In Property Out Of State

    If you can't afford property close to home, consider taking the real estate plunge elsewhere in the country.
  9. Investing

    Costs New Investors in Real Estate Do Not Consider

    As lucrative as real estate investment can be, there are a multitude of costs that new real estate investors must consider.
  10. Financial Advisors

    Illiquid Real Estate: Correlation Pros and Cons

    Stock and bond markets are moving more closely in tandem with each other. Is illiquid real estate the vaccine for this correlation?
RELATED TERMS
  1. Reverse Exchange

    A type of property exchange wherein the replacement property ...
  2. Qualified Exchange Accommodation ...

    A strategy used in some 1031 exchanges where a third party, known ...
  3. Section 1031

    A section of the U.S. Internal Revenue Service Code that allows ...
  4. Like-Kind Exchange

    A tax deferred exchange that allows for the disposal of an asset ...
  5. Like-Kind Property

    Any two assets or properties that are considered to be the same ...
  6. Section 1231 Property

    A tax term relating to depreciable business property that has ...
RELATED FAQS
  1. What criteria does a property need to meet to be considered an 'investment grade' ...

    Learn what it takes for institutional investors to consider a property "investment grade," such as real estate investment ... Read Answer >>
  2. How can I make equity investments in real estate?

    Invest in real estate equity through buying and selling real property or through other more liquid investments like real ... Read Answer >>
  3. What does asset management mean in regards to real estate?

    Find out what role asset managers play in the real estate markets, how real estate portfolios are selected and why entrepreneurial ... Read Answer >>
  4. What is the difference between real estate and real property?

    Understand how real estate is legally different from real property and the implications of that difference for each property ... Read Answer >>
  5. What do real estate investors look for in a property?

    Profit from real estate investments by either flipping homes or becoming a landlord. Learn best practices for a successful ... Read Answer >>
  6. What financial metrics are best for evaluating companies in the real estate sector?

    Learn about some of the most important financial metrics and other analytic tools before investing in a real estate company ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center