Definition
Like-kind property is the qualifying standard at the heart of a 1031 exchange: to defer capital gains tax, an investor must exchange real property held for business or investment use for other real property of a like kind. Importantly, “like-kind” refers to the nature or character of the property, not its grade or quality. Under this broad real-property standard, most U.S. investment real estate is considered like-kind to other U.S. investment real estate.
How the Like-Kind Standard Works
The like-kind test for real estate is intentionally broad, which gives investors flexibility in choosing replacement property:
- Nature, not quality. Improved and unimproved real estate can be like-kind to each other. Raw land, for example, can be exchanged for an income-producing building.
- Broad within real property. Different categories of investment real estate — multifamily, retail, industrial, land — are generally like-kind to one another.
- Held for the right purpose. Both the relinquished and replacement property must be held for productive use in a trade, business, or for investment.
- Real property only. Since 2018, personal and intangible property no longer qualifies.
Tax Treatment and the Post-2017 Rule
Before 2018, Section 1031 could apply to certain personal property. The 2017 Tax Cuts and Jobs Act narrowed §1031 to real property only. That change makes the like-kind analysis for exchanges primarily a real-estate question today. Value that falls outside the like-kind category — cash or other non-qualifying property received — is treated as boot and taxed to the extent of gain. Fractional real-property interests, such as a Delaware Statutory Trust, can also satisfy the like-kind standard.
Key Characteristics
| Feature | Like-Kind Property |
|---|---|
| Authority | IRC §1031 |
| Asset class (post-2017) | Real property only |
| Standard | Nature/character, not grade or quality |
| Holding purpose | Business or investment use |
| Excluded | Primary residence; personal/intangible property |
| Cross-type exchange | Generally allowed within real estate |
Important Considerations
While the like-kind standard is broad, the surrounding 1031 rules are strict, and property held primarily for personal use or for resale (dealer property) may not qualify. Misjudging whether property meets the standard can jeopardize the entire deferral. Real estate also carries market, tenant, and financing risk, including possible loss of principal. Confirm that both your relinquished and replacement properties meet the like-kind and holding requirements with your CPA before proceeding.
Related Terms
- 1031 Exchange — the transaction the like-kind standard governs
- Replacement Property — the like-kind asset acquired in an exchange
- Boot — non-like-kind value that is taxable in an exchange
This definition is educational only and is not investment, tax, or legal advice. Whether property qualifies as like-kind depends on the facts of your situation, and real estate investments carry risk including possible loss of principal. Confirm current rules and your specific treatment with your CPA.
See What Property Could Qualify for Your Exchange
Estimate the capital gains you could defer by reinvesting into like-kind replacement property.