Like-Kind Exchange

Quick Takeaways

The 1031 like-kind exchange is now over 100 years old, and has been helping Americans exchange property since 1921
Like-kind exchanges are far from being only for the wealthy; a look at recent exchanges show that only 5 percent of recently exchanged properties were held by corporations
“The great majority of properties now swapped under the like-kind exchange would not be sold if tax was due. Rather, their owners would continue to sit on the property, and the growth opportunity for putting the investment to better use would be wasted with the government collecting little in extra revenue”

Source: Like-Kind Exchange: Myth Busters (National Association of REALTORS®, May 6, 2021)

1031 Like-Kind Exchanges have been a part of real estate for more than one hundred years. A way to trade properties instead of going through the traditional buying and selling process, like-kind exchanges also often result in the ability to defer capital gains taxes. These transactions are complicated and have many special rules, which can impact taxes – sometimes significantly. You can view the various forms and instructions on the IRS website.

The IRS has many rules regulating like-kind exchanges, which affect taxes sometimes drastically. You can view the various forms and directions on the IRS website.

Like-kind exchanges can provide REALTORS® with the opportunity to work with two properties, and NAR finds 1031 like-kind exchanges to be an essential part of the real estate sector. They promote investment, job growth, and can greatly benefit underserved markets.

Delaware Statuary Trusts (DSTs) are a way to participate in 1031 exchanges without becoming the complete owner of a traded property. DSTs allow up to 100 investors to participate in the ownership of a property, such as a large medical building, and gain passive benefits. They can apply to any type of rental property – residential or commercial.

See References for more information.

Featured

Videos

Next Up: Preserving the 1031 Like-Kind Exchanges

video

October 16, 2020

Listen as NAR’s Charlie Dawson, Evan Liddiard, & Erin Stackley, discuss the status of 1031 Like-Kind Exchanges. Part of the Next Up Commercial Series.

1031 Like-Kind Exchanges, Insights and Updates

1031 Like-Kind Exchanges, Insights & Updates

video

June 29, 2020

The latest on 1031 Like-Kind Exchanges, with Charlie Dawson, NAR's Vice President of Engagement, & Evan Liddiard, NAR's Director of Federal Taxation.

Section 1031 Like-Kind Exchange Additional Resources

Like-Kind Exchange: Member Stories

We need your help to educate lawmakers and their staff about 1031s. It is not a tax loophole for the wealthy; it is a tax tool that has brought immeasurable revenue, jobs, investment, and economic benefit to the U.S.

Share Your Experience

Like-Kind Exchange: Myth Busters

May 6, 2021

If 1031 were repealed or limited, it could cause serious harm to the economy or even a collapse of the already reeling commercial real estate industry

The 1031 Like Kind-Exchange Is a Key Tool for Investing in Diverse and Inclusive Communities

1031: Investing in Diverse and Inclusive Communities

May 6, 2021

Like-kind exchanges can serve as a powerful tool that fosters economic development and promotes job growth for people from all walks of life.

Join the Fight To Save Like-Kind Exchanges

September 23, 2020

Those who understand the growth benefits of the like-kind exchange must again educate their members of Congress and those running for those offices.

The Juice Isn’t Worth the Squeeze

July 22, 2021

Mr. President, there are many reasons why we shouldn’t cap the 1031 like-kind exchange.

Find Opportunities for 1031 Exchanges in Today’s Market

May 24, 2023

Clients with cash may have a real property shopping binge in their future.

Like-Kind Exchange Transactions of REALTORS® in 2016-2019

Like-Kind Exchange Transactions 2016-2019

report

September 4, 2020

This report looks at like-kind exchanges involving members and assesses their views on the economic impacts of the proposed repeal of Section 1031.

IRS Provides Clear Test on How 20% Deduction Applies to Rental Income, Exchanges

IRS Test: 20% Deduction on Rental Income, Exchanges

January 24, 2019

Rules confirm that the deduction applies to business income as an agent, broker, sole proprietor or owner of a partnership, corporation or LLC.

Advocacy

What is the fundamental issue behind Section 1031?

Since 1921, U.S. tax law has recognized that the exchange of one investment or business-use property for another of like-kind results in no change in the economic position of the taxpayer, and therefore, should not result in the immediate imposition of income tax. The like-kind exchange rules permit the deferral of taxes, so long as the taxpayer satisfies numerous requirements and consummates both a sale and purchase of replacement property within 180 days. Real estate investors and commercial real estate practitioners place a very high priority on retaining the current like-kind exchange rules.

I am a real estate professional. What does Like-Kind Exchange mean for my business?

The exchange rules often provide a real estate professional with an opportunity to facilitate two transactions: the sale of the relinquished property and the purchase of the replacement property. Any curtailment of the exchange rules will make both pieces of exchange transactions more difficult to conclude and would mean that many transactions would not take place. The like-kind exchange technique is among the most important of all tax provisions for real estate investors and commercial real estate professionals.

NAR Policy on Like-Kind Exchange

NAR opposes any change that would undermine the deferral mechanisms associated with exchanges or lead to fewer transactions.

The like-kind exchange technique is fundamental to the real estate investment sector. The current law provides investors with a great deal of flexibility in managing their real estate portfolio. Real estate is essentially an illiquid asset that requires substantial commitments of cash. Flexibility is needed in order to assure the free movement of property and capital. This, in turn, results in economic growth and job creation.

Legislative/Regulatory Status/Outlook on Section 1031

During the presidential campaign of 2020, then-candidate Joe Biden’s campaign listed the section 1031 like-kind exchange as an unwarranted loophole that largely benefits higher-income taxpayers and indicated that if elected, he would repeal it.

In early 2021, the Biden White House recommended to Congress that the tax deferral from like-kind exchanges be limited to $500,000 per taxpayer per year in order to help offset the cost of his infrastructure proposals. While this may seem like a large amount to many, such a limit would greatly diminish the use of section 1031 and seriously damage the real estate sector of the economy.

NAR is working with other interested stakeholders to oppose the repeal or limitation of the like-kind exchange provision and to educate Members of Congress and their staffs on the importance of this provision to the economy. For example, NAR is a leading member of a large coalition devoted to preserving the 1031 like-kind exchange. This group has funded two separated studies on the impact that repealing or limiting Section 1031 would have on the economy and on the real estate sector. Moreover, the coalition continues to have meetings with Members of Congress to explain the importance of tax-deferred exchanges in their states and districts. Also, NAR lobbyists continually stress the importance of keeping 1031 intact when meeting with Members and staff on other issues.

While the legislation that once was considered for inclusion of the limit on like-kind exchanges (the Build Back Better bill) is no longer pending in Congress, it no longer appears that 1031 faces the level of danger it did in early 2021. However, NAR has not let down its guard and is watching the situation very closely.

NAR Committee

Federal Taxation Committee

Commercial Federal Policy Committee

References

NAR Library & Archives has already done the research for you. References (formerly Field Guides) offer links to articles, eBooks, websites, statistics, and more to provide a comprehensive overview of perspectives. EBSCO articles (E) are available only to NAR members and require the member's nar.realtor login.

1031 Exchanges: The Basics

What is a 1031 Exchange? A Guide to the Basics, Rules & What to Know (Nerd Wallet, Aug. 2, 2023)

“In effect, you can change the form of your investment without (as the IRS sees it) cashing out or recognizing a capital gain. That allows your investment to continue to grow tax-deferred. There’s no limit on how frequently you can do a 1031 exchange. You can roll over the gain from one piece of investment real estate to another and another and another.”

The Process of a 1031 Tax-Deferred Exchange Explained (Bloomberg Tax, May 12, 2022)

“The replacement property must be of equal or greater value than the relinquished property and all cash equity from the sale must be reinvested to have no tax on the sale of the relinquished property. If the exchanger buys a property of lesser value, the difference of the two property values is subject to capital gains tax and unrecaptured depreciation tax.”

What is a 1031 Exchange? Know the Rules (Investopedia, Jul. 19, 2022)

1031 Like-Kind exchanges, often used to “trade” one real estate property to defer capital gains taxes, have many rules. With many moving parts, there are special rules for depreciable properties, a 45-day rule, a 180-day rule, a reverse exchange and various other rules for second properties, vacation homes etc.

Rules, Forms, & Guidelines From the IRS

The following links provide instructions and tips for IRS tax forms relating to 1031 Like-Kind Exchanges.

Like-Kind Exchanges – Real Estate Tax Tips (United States Internal Revenue Service, Nov. 2, 2023)

What is IRS Form 8824: Like-Kind Exchange (TurboTax, Oct. 19, 2023)

About Form 8824, Like-Kind Exchanges (United States Internal Revenue Service, Feb. 14, 2023)

1031 Exchanges for REALTORS®

Find Opportunities for 1031 Exchanges in Today’s Market (REALTOR® Magazine, May 24, 2023)

“Reading news reports about the state of the real estate market in the U.S., investors might well decide to wait out the market turmoil, particularly as it relates to pondering financing options. For investors with cash and a long-term outlook, though, this may be an optimal time to use the Sec. 1031 tax-deferred exchange to reposition their portfolio.”

How to Do 1031 Exchanges to Defer Taxes (The Balance, Feb. 27, 2023)

“When a replacement property is selected, the taxpayer has 180 days from the date the relinquished property was transferred to the buyer to close on the new replacement property. But the exchange must be completed by the earlier date if the due date for the investor's tax return for the tax year in which the relinquished property was sold is earlier than the 180-day period end date.”

The 1031 Like-Kind Exchange Is a Key Tool for Investing in Diverse and Inclusive Communities (National Association of REALTORS®, May 6, 2021)

“David Doig, President and CEO of Neighborhood Initiatives developed a national grocery story in the food desert of a Chicago’s Southside Bronzeville neighborhood. The site was formerly the demolished Ida B. Wells Public Housing Complex where it remained a vacant lot for more than 15 years. David’s company developed a Mariano’s grocery store in its place and then a New York investment group purchased the new development through a 1031 like-kind exchange. This outside capital infused a rebirth of jobs, housing, and commerce into the community.”

Like-Kind Exchange Transactions of REALTORS® in 2016-2019 (National Association of REALTORS®, Sep. 4, 2020)

This report, published midway through 2020, details the use of like-kind exchanges among REALTORS® from 2016-2019. It highlights the changes that occurred to the 1031 in with The Tax Cuts and Jobs Act of 2017. According to the report, a “majority of properties that were sold in like-kind exchange were held by small investors and that additional capital was invested in the property acquired nine times out of ten.”

Delaware Statutory Trusts (DSTs)

Understanding the Delaware Statutory Trust Full-Cycle Event (Forbes, Aug. 22, 2023)

“For DST investments, the term “full cycle” refers to the complete life cycle of a DST investment, from when the real estate asset was initially acquired all the way through its ultimate disposition or sale. This life cycle begins with the acquisition of the underlying real estate assets by the DST sponsor company, followed by the offering of beneficial interests within the DST to investors seeking a 1031 exchange strategy.”

3 Reasons Delaware Family Trusts Are Here to Stay (Kiplinger, Oct. 27, 2022)

“One of the most fundamental forces helping protect the 1031 exchange market is demographics. According to expert researcher and data analyst Jonathan Jones of Construction Coverage, Baby Boomers hold more real estate wealth than any other generation in history. Born 1946 through 1964, Baby Boomers have an influence on all things real estate that cannot be overstated.”

Delaware Statutory Trust (The Balance, Dec. 27, 2021)

“DST investors may benefit from a professionally managed, potentially institutional-quality property. The underlying property could be a 500-unit apartment building, a 100,000 square-foot medical office property, or a shopping center leased to investment-grade tenants. Most DST investments are assets that your run-of-the-mill, small- to mid-sized accredited investors could not otherwise afford. However, by pooling money with other investors, they can acquire this type of asset.”

Preferred Structure: As a Form of Fractional Investment, DSTs Have Become Popular as a Replacement for 1031 Exchanges (Wealth Management Real Estate, Apr. 1, 2021) E

Delaware Statuary Trusts have become increasingly popular in recent months. Lending DST sponsor, Capital Square Realty, has reported that the first three months of 2021 saw a huge increase in DST activity, helping them have their “strongest year ever.” At least part of this success can be ascribed to the growing amount of accredited investors – baby boomers. As baby boomers continue to age into retirement, they often are looking for new properties and passive income, the perfect situation for DSTs.

Websites

Guide to 1031 Exchanges: Basics, Resources & Intermediaries (BiggerPockets.com)—Quick overview of how 1031 exchanges work, with links to recommended resources and a list of qualified intermediaries.

Federation of Exchange Accomodators (FEA)—Professional organization for exchange specialists. Includes directory of exchange companies & specialists around the U.S.

eBooks & Other Resources

Our eBooks collection contains a plethora of both audio and electronic books for learning a diversity of foreign languages and cultural etiquette standards. Below you will find a sampling of materials available; to identify additional materials visit our Library Catalog Advanced Search page and search for Subject: International or Subject: Foreign.

How to Invest in Real Estate And Pay Little or No Taxes: Use Tax Smart Loopholes to Boost Your Profits By 40% (eBook)

The Tax-Free Exchange Loophole: How Real Estate Investors Can Profit from the 1031 Exchange (eBook)

Books, Videos, Research Reports & More

As a member benefit, the following resources and more are available for loan through the NAR Library. Items will be mailed directly to you or made available for pickup at the REALTOR® Building in Chicago.

Building Wealth Through 1031 Exchanges (Exchange Facilitator, LLC, 2006)

1031 Exchanges: How They Work (Professional Exchange Accommodators, LLC, 2005)

The Tax-Free Exchange Loophole (Wiley, 2005)

Have an idea for a real estate topic? Send us your suggestions.

The inclusion of links on this page does not imply endorsement by the National Association of REALTORS®. NAR makes no representations about whether the content of any external sites which may be linked in this page complies with state or federal laws or regulations or with applicable NAR policies. These links are provided for your convenience only and you rely on them at your own risk.