A property of the same kind refers to two assets which are considered to be of the same type, which makes the tax exchange between them. The two assets must be of the same nature but need not be of the same quality to be considered as similar property.
For example, a single family rental could be sold and the proceeds invested in a multi-family property without triggering capital gains. In the United States, a transfer of like property with tax deferral is called an exchange under Section 1031, referring to the part of the tax code dealing with transfers of like property.
Determination by the IRS of a property of the same kind
Property of similar type must meet the definition established by the Internal Revenue Service (IRS) to qualify for a transfer under Section 1031. The subject properties must be used for business or investment. This limitation aims to exclude main residences which are, by default, for personal use most of the time. Similar property must also be located in the United States to qualify.
For example, a seller cannot use the proceeds from the sale of a hotel in the United States to buy a hotel in Dubai and expect to defer capital gains on the sale. Securities, stocks, holdings in partnerships and other financial assets are excluded from the definition of like property.
How does a similar property swap
A similar property exchange must follow the deadlines set by the IRS. If an investor sells agricultural land, for example, he has 45 days to identify a replacement property. The purchase of the similar property must be made within 180 days of the sale of the farmland or the due date of the income tax return in that year. The IRS may grant an extension of fees to allow a similar exchange to be made before filing.
Similar property in an evolving tax code
The exchange of similar goods for real estate transactions is still in effect, but various changes to the tax code have eaten away at other parts of the definition. In the past, the exchange of similar goods has been used for assets that include everything from cars to art to cryptocurrency holdings.
The law on tax reductions and jobs adopted in December 2020 has removed everything except real estate held for commercial, commercial or investment purposes. There has been a heated debate as to why real estate should benefit from such a privileged tax status when other investments like machinery and equipment face capital gains on each sale, regardless of reinvestment. In 2020, however, exchanging similar assets is still a great way to build tax-deferred wealth in real estate.