To qualify for tax deferred exchange treatment under IRC §1031, the relinquished property must be exchanged for replacement property that is of “like-kind”. For real property exchanges the term “like-kind” refers to the nature or character of the property and not to its grade or quality. For example, it does not matter whether the real property involved is improved or unimproved because that fact only relates to the grade or quality of the property and not to its kind or class. Treas. Reg. §1.1031(a)-I(b). In essence, all real property is “like-kind” with all other real property. Generally, however, for personal property exchanges the relinquished and replacement property must both be in either the same General Asset Class or the same Product Class. To qualify for an exchange the Exchanger must have held the relinquished property for investment, or for “productive use in their trade or business”, and must intend to do the same with the replacement property. The following are examples of “like-kind” properties:
In any exchange the Exchanger must enter into the exchange transaction prior to the close of the relinquished property. The Exchanger and the Qualified Intermediary enter into an Exchange Agreement, which essentially requires that (a) the Qualified Intermediary acquires the relinquished property from the Exchanger and transfers it to the buyer by direct deed from the Exchanger and (b) the Qualified Intermediary acquires the replacement property from the seller and transfers it to the Exchanger by direct deed from the seller. The cash or other proceeds from the relinquished property are assigned to the
Qualified Intermediary and are held by the Qualified Intermediary in a separate, secure account. The exchange funds are used by the Qualified Intermediary to purchase the replacement property for the Exchanger.