How to Qualify for a Like-Kind Exchange

There’s an old saying that goes, “There are two things you can't avoid: death and taxes.”

Well, if you're a real estate investor, immortality is still off the table... and while you can't avoid taxes entirely, you can defer them indefinitely. Specifically, we are talking about capital gains taxes, where the rate can be as high as 37%! This tax-saving strategy is called a section 10-31 or like-kind exchange. If you sell a business or investment property, you can postpone paying the capital gains tax — so long as you work within the 10-31 parameters.

Do I Qualify for a Like-Kind Exchange?

So, what exactly qualifies for a like-kind exchange?

  • First, the property you're selling, and the one you are exchanging it for, both need to be used for business or investment purposes. Primary residences and vacation homes do not qualify.
  • Second, the properties need to be similar. The IRS defines that as "properties that are the same in nature, character or class."

As you can see, the rules are rather vague. That's why it's important to work with a skilled attorney. There are various types of 10-31 exchanges, time restrictions, as well as a list of exclusions. So, again, it's important to have an attorney with experience to keep you in line with the tax code. Your 401k and IRA are simple examples of investment earnings growing, tax-free... but you can do it with real estate investments too! Just don't try to go it alone.

Contact Adler Law by dialing (516) 740-1184 or submitting an online contact form via our website.