Like-kind exchanges are a big deal in the world of commercial real estate. Players in big markets like New York are all too aware of the benefits of this kind of transaction. Basically, after selling one asset, the investor moves right onto another. If these sales are done within a certain timeframe, you can reap big benefits. A like-kind exchange makes it possible for a player in the commercial real estate world to limit his or her tax liability.
The limits for a like-kind exchange
A like-kind exchange has been tax-advantaged for a long time. However, not every sale of property is eligible for this kind of transaction. Section 1031 of the IRS tax code specifies that a like-kind exchange can only happen when both properties are used for business or investments.
To qualify for a 1031 exchange, the seller must see a gain from the transaction and not a loss. The idea behind these transactions is, generally, to drive investment and to limit capital gains taxes for those investors who transact often. Only real estate can be involved in these transactions. Art and intellectual property can’t contribute to the value of the transaction for 1031 exchange purposes.
One other consideration is that all of the assets involved in these exchanges need to be located in the U.S. There can be variation in the size or quality of the assets, but they must be comparable. A seller could get out of a large hotel in California and purchase a smaller one in Florida, but selling in New York and buying in Quebec would not qualify.
Real estate law is complex. It’s always best to consult with an experienced attorney when pursuing such a transaction. Keep in mind that real estate firms and their lawyers are seeking commissions, which can affect the quality of their advice.