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.

RELATED TERMS
  1. Reverse Exchange

    A type of property exchange wherein the replacement property ...
  2. Amount Recognized

    The amount of capital gain/loss that must be reported on the ...
  3. Form 4797

    A tax form distributed by the Internal Revenue Service (IRS) ...
  4. Section 1250

    A section of the United States Internal Revenue Service Code ...
  5. Short Term

    1. In general, holding an asset for short period of time. 2. ...
  6. Direct Tax

    A tax that is paid directly by an individual or organization ...
Related Articles
  1. 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.
  2. Options & Futures

    Use Real Estate To Put Off Tax Bills

    Find out how you can build wealth and reduce your taxes.
  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. Investing

    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

    Your Property Tax Assessment: What Does It Mean?

    Understanding your property taxes can protect you from financial shocks.
  7. Home & Auto

    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.
  8. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  9. Economics

    What is a Tax Liability?

    Tax liability is the amount of money a person or entity owes to the government as the result of a taxable event.
  10. Options & Futures

    20 Investments: Real Estate & Property

    What Is It? Usually, the first thing you look at when you purchase a home is the design and the layout. But if you look at the house as an investment, it could prove very lucrative years down ...
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. 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 >>
  3. Are stocks real assets?

    Learn why stocks are classified as financial assets, not real assets. Understand the properties that determine whether an ... Read Answer >>
  4. What are the most common deferred tax assets used by individuals?

    Use these deferred tax assets to reduce your tax liability and grow your assets simultaneously. Discover the most common ... Read Answer >>
  5. In which US cities do high-income earners pay the most tax?

    See which U.S. cities punish high net worth individuals the most through the highest levels of income taxes, property taxes ... Read Answer >>
  6. 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 >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. 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 ...
  3. White Squire

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

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. 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, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center