It is axiomatic that undertaking a like-kind exchange of real property means that the taxpayer will continue to own real property when the exchange is completed. Taxpayers who intend to sell property should consider many tax and nontax factors before deciding whether a like-kind exchange is the best option. The following are examples of nontax reasons for continuing to invest in real property following a sale:

  • Consolidating investments by exchanging several small properties for one larger replacement property;
  • Diversifying investments by exchanging one property for several smaller replacement properties in different locations;
  • Eliminating property management problems on one property by acquiring either a problem-free property or an interest in a larger property that employs a third party property management company;
  • Replacing property having limited potential for appreciation with property having greater potential for appreciation;
  • Realigning some or all of a real estate investment portfolio by exchanging high-risk, high-yield property for low-risk, low-yield property, or vice versa;
  • Increasing cash flow by exchanging property with limited cash flow for property with greater cash flow;
  • Relocating a business by exchanging the property on which it is located for property in a different area;
  • Replacing an aging commercial facility with a modern, newly constructed commercial facility;
  • Increasing investment leverage by acquiring property with a smaller ratio of equity to fair market value; and
  • Terminating a problem joint ownership by exchanging joint interests for separate properties.Non tax considerations may also lead the taxpayer to liquidate, rather than continue, an investment. The taxpayer may need cash liquidity or wish to invest in another form of investment. The taxpayer may be willing to pay the tax on the gain to obtain steady income with less risk. For example, a taxpayer may prefer a passive investment such as bonds or treasury bills rather than real estate.
Categories: Federal Tax Articles, Like Kind (IRC 1031), Tax Articles, Tax Free Exchanges