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.

RELATED TERMS
  1. Qualified Exchange Accommodation ...

    A strategy used in some 1031 exchanges where a third party, known ...
  2. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  3. IRS Publication 544

    A document published by the Internal Revenue Service (IRS) that ...
  4. Property Tax

    A tax assessed on real estate by the local government. The tax ...
  5. Amount Recognized

    The amount of capital gain/loss that must be reported on the ...
  6. Deferred Tax Liability

    An account on a company's balance sheet that is a result of temporary ...
Related Articles
  1. Taxes

    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.
  2. Taxes

    Trade Properties To Keep The Taxman At Bay

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

    Avoid Capital Gains Tax On Your Home Sale

    If you have property to sell and want to avoid capital gains tax, a Section 1031 exchange may be the answer.
  4. 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.
  5. Taxes

    10 Things to Know About 1031 Exchanges

    Real estate swaps grow popular, but traps are many. Beware new rules on vacation homes.
  6. 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.
  7. 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.
  8. Taxes

    Deferred Tax Asset

    A Deferred Tax Asset is an asset on a company’s balance sheet that may be used to reduce taxable income. It is the opposite of a deferred tax liability, which describes something that will increase ...
  9. Investing

    Your Property Tax Assessment: What Does It Mean?

    The amount of a property tax bill is based on the property’s value, the exemptions it qualifies for, its use and the local property tax rate.
  10. Taxes

    Deferred Tax Liability

    Deferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the ...
RELATED FAQS
  1. How is a deferred tax asset taxed?

    Find out how the IRS and FASB treat deferred tax assets, which a company can recognize in order to reduce its future tax ... Read Answer >>
  2. How does a company derecognize a deferred tax liability?

    Learn about how deferred tax liabilities arise, when they must be reported in the financial statements, and how a company ... Read Answer >>
Hot Definitions
  1. Benchmark

    A standard against which the performance of a security, mutual fund or investment manager can be measured.
  2. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  3. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  4. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  5. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  6. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
Trading Center