Don’t misinterpret like-kind property
When completing a successful exchange, a taxpayer must relinquish and acquire like-kind property. However, many taxpayers misinterpret like-kind property. All too often I hear, “If I exchange a duplex, don’t I have to buy a duplex?” I always respond by clearly defining like-kind property.
Like-kind property refers to the intended use of the real property, not the type of real property, as investors often believe. Provided that the property is initially acquired and held for either business or investment purposes, it can qualify as a suitable replacement property under IRC Section 1031. Like-kind real property exchanges may, for example, include any of the following: bare land for a rental house, duplex for a fourplex, retail center for an apartment complex or an office building. And yes, you can also exchange from residential to commercial property (and vice-versa)!