Like-Kind Exchange refers to a tax-deferred exchange of similar types of property, which allows investors to swap assets and defer capital gains taxes on the transaction.
In the context of U.S. tax law, a Like-Kind Exchange is governed by Section 1031 of the Internal Revenue Code. It applies primarily to real estate, enabling property owners to sell one property and purchase another similar property without recognizing a gain or loss for tax purposes at the time of the exchange.
To qualify, both the relinquished property (the one being sold) and the replacement property (the one being acquired) must be of a "like-kind," meaning they are similar in nature or character, regardless of grade or quality. For example, an investor can exchange an apartment building for raw land or a commercial property, provided both are held for investment or business purposes.
It’s important to note that personal residences do not qualify for a Like-Kind Exchange, and the transaction must adhere to specific timeframes and identification rules to maintain eligibility for tax deferral.
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