The Like Kind Exchange

The Like Kind Exchange is a provisional portion of the US Tax code that is used a lot by larger business. Simply put what it allows you to do is to take one business or asset and sell it and buy another or exchange it for another that is similar without having to pay the tax consequences or liability of the sale of the first business or asset.

The Like Kind Exchange is also known as a 1031 exchange because that is the number of the provision in the tax code that allows for it. The money can also be deferred until a later time when there is no Like Kind Exchange taking place after a sale.

The basic idea behind the Like Kind Exchange is that there has been no financial gain if you merely change one business or asset for another of similar type or style and you are simply swapping one for the other, in essence. A good example here would be if you own one building and sell it and purchase another one from the money from the sale. For this you are not actually making a profit the business is just relocating the place where the asset is located.

There are a few things to remember. The property has to be business and not personal. Any new asset that is being purchased or property being gotten has to be of a similar nature to that which was sold. You must also turn around and purchase the new asset or property within 180 days from the sale of the first asset or property to take advantage of the Like Kind Exchange tax benefit.

The term is fairly loose in definition by the IRS tax code and it merely says that to be considered as a Like Kind Exchange and we quote the code here where it states that “the nature of character of the property and not to its grade or quality.” So it is ambiguous at best. As long as it is a silimar property, according to the writing on the code, you could downgrade and still qualify.

This is one big reason that the larger businesses take advantage of the Like Kind Exchange. It allows them a method of getting around paying certain amounts of tax by deferring it down the line creating sort of a programmable tax shelter of sorts where you can work more or less your own deal out.

While there are a lot more details, too many to cover here in such a small space, if you are in business you may want to consider asking your tax professional about the benefits afforded under the Like Kind Exchange provision and see if there is anything there that may be advantageous to you from a tax standpoint.

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Like Kind Exchange

irs like kind exchange

The Like Kind Exchange

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