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

Section 1031 Like-Kind Exchange Additional Resources

Like-Kind Exchange Member Stories

We need your help to educate lawmakers and their staff about 1031s. Submit your stories about your experience with Section 1031 Like-Kind Exchanges.

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If 1031 were repealed or limited, it could cause serious harm to the economy or even a collapse of the already reeling commercial real estate industry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

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.

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? Know the Rules (Investopedia, Apr. 19, 2024)

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.

What is a 1031 Exchange? A Guide to the Basics, Rules & What to Know (Nerd Wallet, Feb. 28, 2024)

“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.”

1031 Exchange 101 for Real Estate Investors (Trout CPA, Feb. 28, 2024)

A real estate investor considering a 1031 exchange needs to keep in mind that the taxable gain is only deferred, not eliminated. The investor can continue to defer the gain into new properties by using a 1031 exchange each time they replace the property. However, if the investor ever wants to cash out by selling the property without a 1031 exchange, they will have to pay the tax on the gain at that time. If the gain has been deferred for many years into multiple properties, the tax basis could be very low due to depreciation while the value has increased over time. The amount of the gain and the resulting tax could be very substantial.

What Is a Like-Kind Exchange? (SmartAsset, Feb. 15, 2024)

The deferred exchange may be the most common. The seller sells the property and has 45 days to identify the property that will be exchanged for it. Then, the seller has 180 days to complete the sale. An exchange facility is often used to facilitate the deferred exchange to be sure it doesn’t become a taxable event.

Is a 1031 Real Estate Exchange Right for You? (Bessemer Trust, Feb. 6, 2024)

What makes 1031 exchanges potentially useful is that they may allow you to defer the payment of any capital gains tax normally due from a sale. Some investors may wait until they are in a lower tax bracket before paying capital gains taxes due upon a sale.

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)

What is IRS Form 8824: Like-Kind Exchange (TurboTax)

About Form 8824, Like-Kind Exchanges (United States Internal Revenue Service)

1031 Exchanges for REALTORS®

Maximizing Opportunities: How 1031 Exchanges Benefit Real Estate (Sparks1031, Jun. 29, 2024)

By specializing in 1031 Exchanges, agents can attract a diverse clientele of sophisticated investors seeking tax-deferral strategies. These clients often have substantial real estate portfolios and are looking for agents with expertise in navigating the complexities of exchange transactions. Establishing oneself as a knowledgeable advisor in this niche market can lead to long-term relationships and referrals.

1031 Exchanges: Common Mistakes to Avoid (Collin County Area REALTORS®, May 31, 2024)

Proper documentation is crucial for a 1031 exchange. Failing to have and maintain accurate records or submitting incomplete documentation can result in the disqualification of the exchange.

1031 Exchange Resources for Realtors and Brokers (Equity Exchange, Feb. 6, 2024)

Being knowledgeable about 1031 exchanges not only enhances your reputation with clients but can also lead to increased referrals from satisfied clients. Proactively identifying opportunities for clients to benefit from 1031 exchanges demonstrates your expertise and commitment to their financial success.

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.”

Delaware Statutory Trusts (DSTs)

Using a Delaware Statutory Trust (DST) in a 1031 Exchange (The Law Offices of Joseph A. Dipiazza, LLC, Jul. 12, 2024)

A 1031 Exchange is a powerful tax-deferral strategy for real estate investors, allowing them to defer capital gains taxes by reinvesting the proceeds from the sale of one property into another like-kind property. However, the process comes with strict deadlines, including identifying a replacement property within 45 days of the sale. For many investors, meeting this deadline can be challenging. This is where a Delaware Statutory Trust (DST) can be an invaluable tool.

What is a DST? The Benefits of Delaware Statutory Trusts (Origin Investments, May 21, 2024)

Delaware Statutory Trust, or DST, investments allow owners of real estate investments to pool their capital. Then, they exchange it for institutional assets with professional management. For example, an investor owns a property worth $500,000. By employing a 1031 exchange, they can convert that ownership to another property worth $500,000. But by employing a DST, they can roll their investment into a property or properties worth much more. Even better, the DST provides a passive ownership structure.

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.”

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

How to Do a 1031 Exchange of Real Estate (eBook)

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)

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