An Overview of Like-Kind Property

Like-kind real property is easy to define: All real estate in the United States is like-kind property. Section 1031 makes no distinction in qualities of real estate. Therefore a city lot is like-kind to farmland; and improved property is like-kind to a vacant lot.


Even though a transaction meets the like-kind requirement, the Taxpayer must still meet all the other requirements of  § 1031 (i.e., holding; purpose) before a transaction can qualify for tax-deferred treatment.


Real estate located outside the United States (i.e. “Foreign” real estate) is not like-kind to real estate in the 50 states, even if it is located in an affiliated commonwealth or territory, such as Puerto Rico.   An exception is found in PLR 9038030, which extends the definition of “like kind” to include real estate in the U.S. Virgin Islands.  The property being sold must be income property and the taxpayer would have needed to make an election on his tax return to treat the property as U.S. domestic property.  A similar exception has also been made for property in Guam and the Northern Mariana Islands. (See:  26 C.F.R. 1.935-1.)


Interests held in a partnership are not like-kind. The exchange of partnership interests is specifically prohibited.  § 1031 (a)(2)(D). [The special issues raised by this code section and methods to deal with it will be discussed in a later section.] To determine the nature of a property interest, look to the law of the state where the property is located. Unfortunately, this may lead to conflicting results.


For example: Growing timber is not like kind to fee title. Oregon Lumber Co. v. Comm., 20 T.C. 192 (1953); TAM 9525002. Growing timber is like kind to fee title. Smalley v. Comm., 116 T.C. No. 29 (2001). Illinois Land Trusts present a unique problem. Certificates of trust or beneficial interests in trusts are specifically excluded from non-recognition treatment under  § 1031. The beneficial interest in an Illinois land trust is personal property under state law. However, the IRS will treat that interest as "like-kind" for the purpose of an exchange. The trustee is merely an agent to hold and transfer title, not a trustee who actively works to protect and conserve property for a beneficiary. Rev. Rul. 92-105, 1992-491 I.R.B. 4. [NOTE: A land trust with multiple beneficiaries may be treated as a partnership.]


The interests and rights exchanged must be of the same general character, or of substantial equality. Items that may not appear to be like-kind often are. One of the most common interests that is exchanged is a leasehold.


A leasehold interest with an unexpired term of greater than 30 years (including optional renewal periods) is like-kind to a fee interest. A lessor cannot exchange a lease for a fee interest, since the lessor­s interest is in receiving money, which is not like kind to the real estate. A lessee can exchange his leasehold interest for a fee interest. This "30-year rule" also applies to other terminable interests (e.g., a life estate or estate for years).


PLR 200137032 deals with an unusual property interest (i.e. a co-operative apartment in New York City) and the need to rely on state property law to reach its decision. The Taxpayer owned stock in the corporation that owned the building, and occupied a unit under a lease that had more than 30 years left on its term. The building was changing from a co-operative form of ownership to a condominium form. The Taxpayer wanted to exchange his leasehold interest and stock for a deed to the same unit he currently occupied. The IRS looked to New York law to determine if the interests were like-kind. It found that the state law was unclear, so it found in favor of the Taxpayer.