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. Section 1031

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

    Any two assets or properties that are considered to be the same ...
  3. Reverse Exchange

    A type of property exchange wherein the replacement property ...
  4. IRS Publication 544

    A document published by the Internal Revenue Service (IRS) that ...
  5. Taxable Gain

    A profit on the sale of an asset that is subject to taxation. ...
  6. Form 4797

    A tax form distributed by the Internal Revenue Service (IRS) ...
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

    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.
  3. 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 ...
  4. 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.
  5. 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 ...
  6. Taxes

    The 7 Best States For Property Taxes, and Why

    Understand why some states have high property taxes while others have low property taxes. Learn about the states with the lowest property taxes.
  7. Investing

    What is a Real Asset?

    A real asset is a physical asset that has value.
  8. Investing

    Your Property Tax Assessment: What Does It Mean?

    Property taxes are a primary source of revenue for governments, and they’re a big expense for homeowners. They can vary widely depending on where you live.
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. Who is eligible to hold a deferred tax asset?

    Find out when U.S. companies are allowed to hold deferred tax assets and report them in the financial statements according ... Read Answer >>
Hot Definitions
  1. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  2. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Zero Day Attack

    Zero Day Attack is an attack that exploits a potentially serious software security weakness that the vendor or developer ...
  6. Effective Tax Rate

    The average rate at which an individual or corporation is taxed. The effective tax rate for individuals is the average rate ...
Trading Center