Clarifying "Like Kind" Exchanges
Recently, Bob was asked about like kind exchanges:
“The more I think about it, it seems that ” like kind ” property is a very loose term. I guess the ” character” of the property more important than it’s use. I mean if you have a duplex and you exchange it for an apartment building then that is clearly “like kind” . But if you exchange that duplex for say a property with a restaurant then that would not seem to be “Like kind”. Mostly it seems like this is used for exchange of rental or timber property but it must also apply to other businesses and I suppose it doesn’t really matter what the business is. Can we just cover it with a blanket called ” Investment property”?
So do we categorize properties? Business, trade, rental, timber, vacant land… I can’t really think of any others, manufacturing maybe. Or do we just do what “feels” like it would be a reasonable argument for ” like kind”?
Nelsonian Theory has the answer:
Like Kind:
- Property held for long term investment (not income generating, but held for appreciation in value): e.g..: a lot, ten acres etc.
- Property held for
- Productive use in trade or business; or,
- Generation of long term passive income (rental property).
Not Like Kind:
- Personal use assets (personal use, not business use)
- Personal residence
- Second residence
- Property acquired for resale to others (dealer status)
- Personal property (REIT’s, appliances, cars, etc.
- Partnership interests
- Stock and bonds (secured or unsecured by real estate)
The real test: What was the intent of use at time of acquisition, and then how was it used after acquisition.
