All property investors who are exchanging property (either held for business use or held for investment) qualify for Like-Kind Exchanges. A real estate investor or a property owner who has property that will generate a net gain when it is sold should review all the 1031 exchange requirements in the tax code. A property that will net gain generally has been substantially depreciated for tax purposes and/or has appreciated in fair market value. Properties located in the 50 United States may be transferred in a Like-Kind Exchange with other properties in the 50 United States. Properties outside the United States are not valid for Like-Kind Exchanges within the United States.  Property released by the Exchanger is known as Relinquished Property. Property received in place of the Relinquished Property is known as Replacement Property.

A trade of Like-Kind property (held for business use or held for investment) must meet the following six conditions according to the IRS to be non-taxable:

1. The Relinquished Property and the Replacement Property must be business or investment property. No property designated for personal use can be traded in a Like-Kind Exchanges.

Valid Property: an apartment complex

Invalid Property: a family car or home

3. The property must not be stocks, bonds, notes, choses in action, certificates or trust or beneficial interest, or other securities or evidences of indebtedness or interest.

4. A trade of Like-Kind property must take place. Like-Kind property includes Property that falls under the same of 13 General Asset Class or the same Product Class (in the North American Industry Classification System [NAICS]).

5. The Replacement Property must be identified in writing within 45 days after the day that the Relinquished property is given up.

 6. The Replacement Property must be received on or before:

Example 2: A Like-Kind Exchange
Person A would like to trade an office chair with Person B’s computer keyboard. Although the property may be of equal value, because the office chair falls under class 00.11 and the keyboard falls under class 00.12, the two properties are not considered to be of Like-Kind, and do not meet Section 1031 Exchange requirements.

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00.11  Office furniture, fixtures,and equipment
00.12  Industrial systems, such as computers and peripheral equipment
00.13  Data handling equipment other than computers
00.21  Aircraft (except for air-planes used to carry passengers or freight)
00.22  Automobiles and taxis
00.23  Buses
00.241 Light general purpose trucks
00.242 Heavy general purpose trucks
00.25 Railroad loco-motives, except those owned by transportation companies
00.26 Tractors for over-the-road use
00.27 Trailers and trailer-mounted containers
00.28 Marine vessels, except those used in marine construction
00.4 Steam and electric generation and distribution systems

If a property is not in a General Asset Class or the NAICS, it is not considered to be a Like-Kind property and would not meet the 1031 exchange requirements.

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