Like-Kind Exchange


DEFINITION of 'Like-Kind Exchange'

A tax deferred exchange that allows for the disposal of an asset and the acquisition of another similar asset without generating a tax liability from the sale of the first asset. This can include the exchange of one business for another or one real estate investment property for another property. An 8824 form must be filed with the IRS detailing the terms of the deal.

This is also known as a "1031 exchange".

BREAKING DOWN 'Like-Kind Exchange'

There are several important considerations with this type of exchange to ensure that a tax liability is not created upon sale of the first asset:

1. The asset being sold must be an investment property and can't be a personal residence.
2. The asset being purchased with the proceeds must be similar to the asset being sold.
3. Te proceeds from the sale must be used to purchase the other asset within 180 days of the sale of the first asset, although you must identify the property or asset that you are purchasing in the like-kind exchange within 45 days of the sale.

There are some limitations on the amount of capital gain that is tax deferred, so ensure that you check the latest tax rules before proceeding with a like-kind exchange.

  1. IRS Publication 544

    A document published by the Internal Revenue Service (IRS) that ...
  2. Like-Kind Property

    Any two assets or properties that are considered to be the same ...
  3. Tax Deferred

    Investment earnings such as interest, dividends or capital gains ...
  4. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  5. Investment Real Estate

    Real estate that generates income or is otherwise intended for ...
  6. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
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