Real estate constitutes the foundation of economic activity, with real estate transactions providing the connecting pathways between individuals, businesses, and governments. In 2014 the value of real estate in the United States totaled $42.4 trillion.1 Sales of commercial real estate assets—priced at or above $2.5 million—totaled $438 billion2 in 2014, while sales of smaller commercial assets— priced below $2.5 million— comprised an additional $60 billion.3 In addition, sales of residential real estate totaled $1.1 trillion4 in 2014, with existing properties accounting for 89% of the total.

For a significant proportion of real estate market participants, like-kind exchanges (LKE) provide an important vehicle to dispose and acquire property. Internal Revenue Code (IRC) Section 1031 codifies that the tax owed on any gain after an exchange may be deferred as long as the proceeds are reinvested in a similar property through a like-kind exchange. The Internal Revenue Service (IRS) makes note of the fact that while the gain "is tax- deferred […] it is not tax-free."5

Like-kind exchanges are available to individuals, partnerships, corporations, limited liability companies, as well as trusts. The main requirement of a like-kind exchange is that the disposition of one property and acquisition of another property must be part of an integrated transaction, rather than two individual transactions. In addition, while both real and personal property qualify, the properties must be similar, pursuant to specific criteria which delineate eligibility.

According to the IRS, "like kind property is property of the same nature, character or class. […] Most real estate will be like-kind to other real estate."6 Generally, a parcel of land with a rental house may be exchanged for vacant land. Similarly, an office building may be exchanged for an industrial warehouse or a retail shopping center. The IRS makes exception with real properties located outside the United States, noting that domestic U.S. real estate may not be treated as like-kind to international real estate.

Personal property does not qualify as like-kind with real property for exchange purposes. For personal property, qualifying criteria are more stringent. For example, to be eligible for a like-kind exchange, a tractor may not be exchanged for a truck, and—in the case of livestock—a dairy cow may not be exchanged for a beef cow.

Like-kind exchanges also feature a time factor. Once a property is disposed of, the replacement property has to be identified within 45 days, and the replacement property must be acquired and the exchange completed within 180 days.

The main benefit of like-kind exchanges resides with the opportunity to allocate capital and resources more efficiently. For example, an entrepreneur may develop a business idea leading to better economic use of an existing property. Engaging in a like-kind exchange would allow the repositioning of the property and the realization of economic gains. Therefore, transactions of such properties are of great importance for economic growth and job creation. The benefit is even more so during periods of transition, such as economic recessions and recoveries, when individuals' and businesses' needs change significantly.

The National Association of REALTORS® represents more than 1 million members, who are actively engaged in real estate transactions across the full spectrum of property types, from land to residential houses, and from office and industrial buildings to retail properties and apartments. REALTORS® are active participants in like-kind exchanges as investors, brokers and agents, intermediaries and professional advisors. This report provides their perspectives on the like-kind exchange environment from a real estate viewpoint.

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1 Federal Reserve Board, Flow of Funds B.101, B103, B104 tables
2 Real Capital Analytics, US Capital Trends®
3 Smith and Ratiu (2015), "Small Commercial Real Estate Market," National Association of REALTORS®
4 U.S. Census Bureau, New Residential Sales; National Association of REALTORS® Existing Home Sales
5 Internal Revenue Service, Like-Kind Exchanges Under IRC Code Section 1031, FS-2008-18, February 2008
6 Ibid.

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