What is a like-kind exchange for tax purposes?

On Behalf of | Dec 21, 2021 | IRS Tax Law

Tax law changes take place often in the United States, and there are many rules and exceptions for Texas residents to understand. For example, like-kind exchanges have been in the Internal Revenue Code for a long time, but what are they?

IRS like-kind exchanges

A like-kind exchange is when a person exchanges property or investments of one business for assets of the same type in another. Under IRS tax law, a person doesn’t have to declare a loss or gain from a like-kind exchange on the Internal Revenue Code Section 1031. People should still recognize any property gained that isn’t like-kind, however.

The Tax Cuts and Jobs Act

Under the Tax Cuts and Jobs Act, a like-kind exchange only applies to real property. Under the new IRS Tax Law, the intangible or personal property doesn’t count for a like-kind exchange. Real property held for sale isn’t a like-kind exchange. The new Section 1031 works with taxpayers with the qualifying exchange of property or assets.

Changes on Jan. 1, 2018

Most intellectual property and intangible business assets don’t count on the Internal Revenue Code Section 1031 for like-kind exchange starting Jan. 1, 2018. Some examples of assets and property the IRS doesn’t recognize for a like-kind exchange include vehicles, artwork, patents, collectibles, and machinery.

Like-kind property

Properties need to be the same in nature and character to be a like-kind exchange. Properties don’t always have to be the same quality or grade. The IRS allows real property, whether it needs repairs or a person improves the property beforehand. It’s important to remember that like-kind real property in the U.S. differs from real property in other countries.

Like-kind property exchanges allow people to ignore gains and losses from a deal. It’s important to understand that not all properties and assets count as like-kind, however. To report like-kind exchanges, a person can use Form 8824.