Economists' Outlook

Housing stats and analysis from NAR's research experts.

Like-Kind Exchanges Lead to Capital Investments

This blog post was written by George Ratiu, Director of Quantitative & Commercial Research and Erin Fitzpatrick, Research Intern.

Like-kind exchanges (LKE) provide an important vehicle to sell and acquire property—both real and personal. A key feature of LKEs consists of allowing a property owner to dispose of a property and acquire another one of like-kind, with any gain after the disposition deferrable as long as the proceeds are reinvested in a similar property.  The Internal Revenue Service (IRS) makes note of the fact that while the gain “is tax-deferred […] it is not tax-free.”[1] At some point, the property owner disposes of the property and gains are recognized, leading to tax payments.

LKEs were recognized in tax law going back to the Revenue Act of 1921. The underpinning principle of the law was the fact that a taxpayer’s economic position did not change as a result of an exchange of property for another of like-kind.  With no change in economic position, there was no need to recognize or impose a tax on the transaction. Any gain from the transaction was deferred.  This principle is important as it recognizes that LKEs are a tax-neutral feature of the law, which does not result in a loss of tax revenue.

An important aspect of this process is the cost basis of the original property. The basis is carried forward to any and all subsequent properties. The property owner does not have the ability to depreciate a newly acquired property at the higher exchange value, but retains the disposed property’s original cost.

Like-kind exchanges provide several major benefits. The main one is the freer flow of capital. LKE transactions allow property owners to allocate capital more efficiently and be flexible in the face of changing economic and market conditions. Another main benefit is that LKE transactions lead to commerce and economic growth. Generally, LKEs involve additional investments in improving properties—especially for real estate—which generate jobs.

The Like-Kind Exchanges: Real Estate Market Perspectives 2015 report illustrates that like-kind exchange transactions facilitated additional capital into the local market. When asked if they or their clients invested additional capital in order to make improvements after acquiring real property, a majority of REALTORS®— 86 percent—answered affirmatively.

add cap
Moreover, 56 percent of respondents indicated that they or their clients made property improvements in the 10 – 24 percent range of the acquired property’s fair market value. An additional 16 percent reported that the volume of new capital for improvements accounted for 25 – 49 percent of the property’s fair market value.  REALTORS® pointed to the fact that these additional investments are generally responsible for the creation of new jobs, such as construction and property management.
avg capital
To access the Like-Kind Exchanges: Real Estate Market Perspectives 2015 report, visit

[1] Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008

Notice: The information on this page may not be current. The archive is a collection of content previously published on one or more NAR web properties. Archive pages are not updated and may no longer be accurate. Users must independently verify the accuracy and currency of the information found here. The National Association of REALTORS® disclaims all liability for any loss or injury resulting from the use of the information or data found on this page.


Comment Policy

The opinions expressed in reader comments sections on this website are those of the reader and not NAR or REALTOR® Magazine.

About Economists' Outlook

Visit this blog daily to see what NAR experts are saying about the economy, the housing market, and other factors that will impact your business.

Housing Minute

Housing Minute is a monthly video series highlighting the latest housing data from the National Association of REALTORS® in a minute or less.