What Is Like-Kind Real Estate?

Definition & Examples of Like-Kind Real Estate

Like-kind real estate is a piece of property or land that is similar to another in nature or character. This designation is important to the Internal Revenue Service (IRS) because in most cases when you sell a piece of property or real estate, you will have to pay the capital gains tax. But in some cases, if you sell the property to purchase a second that is enough like the first, you can skip the tax.

Learn more about the rules that surround these types of exchanges, and how they can work in your favor as you invest in real estate.

What Is Like-Kind Real Estate?

Under IRS Code 1031, like-kind parcels of business or investment real estate can be exchanged, one for the other, without needing prompt payment of capital gains taxes. You may also hear these types of trades referred to as 1031 exchanges.12

How Do I Know If My Purchase Qualifies?

There aren’t many rules when it comes to what counts as like-kind real estate. In fact, it’s quite simple. To qualify, the property needs to meet both of the following criteria:

1. It must be a physical piece of “real” property.
2. Its intent must be for the purpose of investment or business.

The size, value, level of development, and other factors don’t play a role. And since the rule falls under the purview of the U.S. tax code, it should be noted as well that the property has to be in the U.S.3

How Like-Kind Real Estate Works

According to the IRS, like-kind real estate refers to business or investment properties that are “of the same nature or character, even if they differ in grade or quality.” An example may include exchanging a hotel for an apartment building. This applies even if one was much larger, of higher value, or more developed than the other, so long as it is still alike in nature or character.4

At first, IRS code allowed for intangible property and personal assets to be deemed like-kind real estate. They went so far as to include items like cars, equipment, and machinery, to name a few. This changed in 2018, when the Tax Cuts and Jobs Act (TCJA) went into effect.

In order to count as like-kind real estate in the eyes of the IRS, both properties must be located in the U.S. Also, the replacement piece of real estate must be of the same or greater value than the first.

Types of Like-Kind Real Estate

Some common types of like-kind real estate include:

• Apartment buildings, duplexes, triplexes, etc.
• Hotels
• Farms and ranches
• Malls and shopping centers
• Office buildings
• Commercial properties
• Condo units
• Industrial buildings
• Vacant land
• Self-storage facilities
• Restaurants

Raw land can also count as like-kind real estate and may be exchanged for business- or investment-related properties. If you invest in real estate, this can be a good way to turn a parcel or piece of land that is just sitting idle and doesn’t produce any income into a solid investment, or many.

Pros and Cons of Like-Kind Real Estate

Pros	Cons
No capital gains taxesIncentivizes real estate development and improves market valueAllows you to exchange one property for many	Complex transactionsMay need a third-party intermediary

Pros Explained

Tax Perks

The clear benefit of a like-kind exchange is that it allows you to avoid capital gains taxes when you invest in this manner. Rather than paying tax on an idle piece of land or real estate, you can put the full sales profit toward a new piece of property that earns income. The rule works in your favor even more so if you can apply the exchange towards more than one source of real estate income, such as a condo complex, or zoning for retail spaces.For most people, capital gains are taxed at 15%. For people in the highest tax brackets the rate goes up to 20%.5 Given these rates, a like-kind exchange can have a big impact on your bottom line.

Boosts Real Estate Market Value

According to a survey by the National Association of Realtors, like-kind exchanges also help investors and developers better allocate funds, make better use of land, and infuse more cash into local markets. The survey of agents found that 86% of their clients (out of a total 1031 surveyed) put extra money into their properties after the exchange. More than half the agents said investors also greatly improved the properties’ total market value.6

Greater Income Streams

Another perk is that the IRS allows you to exchange one like-kind property for many. You can choose from:

1. Three properties of any value;
2. An unlimited number properties, as long as their combined value is the same as or less than 200% of your original property;
3. An unlimited number of properties, as long as each one has a value of 95% or more of the original.7

Cons Explained

Tight Timelines

On the downside, like-kind property exchanges come with a tight timeline. If you want to defer capital gains taxes in this way, you need to choose your new property within 45 days of selling the old one. The full exchange of the properties must be complete within 180 days.

High Degree of Complexity

Also, these types of transactions can be very complex. For one, the property owner must be careful not to receive even a portion of the proceeds. They might need to use a qualified intermediary to manage the transaction. This is often an accountant, attorney, or real estate broker, but could be any agent who knows the field.2 In effect though, getting help from a third party could mean paying an extra fee or commission.

Who Are Like-Kind Real Estate Exchanges For?

Like-kind real estate exchanges can prove to be a handy tool for anyone looking to invest in real estate. When used properly, they can put off your tax liabilities, make purchasing new income-producing properties easier, and allow you to expand your portfolio. 

Just make sure you consult a knowledgeable intermediary if you’re not familiar with these exchanges, as they can often be complex transactions. One misstep, and you could end up in violation of the Internal Revenue Code, which might mean a hefty penalty fee.

Key Takeaways

• Like-kind real estate exchanges allow similar properties to be exchanged with no capital gains tax paid.
• The properties in a like-kind exchange need to be business or investment in nature, but they don’t have to be the exact same type of structure.
• It’s advised to seek professional help with these complex transactions if they are new to you, because the tax consequences can be severe.

Source: The Balance

Zillow ranks Raleigh’s housing market No. 3 in the nation

ABC 11 By Tim PulliamTuesday, January 4, 2022 6:12PM

RALEIGH, N.C. (WTVD) — Zillow ranks Raleigh’s housing market No. 3 in the nation.

Zillow predicts the city will jump to the No. 2 spot by the end of the year.

The company expects the home values will rise nearly 24% by November.

Raleigh is in the Top 10 based on several projections:

• Home-value growth
• Strong job market
• Fast-moving inventory.

According to Triangle Multiple Listing Service, as of December, a home stays on the market for an average of just four days

Karen Foster, a Realtor and broker with Keller Williams Realty in Raleigh, told ABC11 that a balanced housing market has a six-month supply of homes.

But as of last month, the Triangle has 0.6 of a month’s supply.

“At least 63 people move here every day, and it’s because of the substantial growth that we have had over the last few years,” Foster said. “Home prices have appreciated beyond measure that people never expected. In just two years, homes that are selling for $200,000 are now selling for $300,000 in certain neighborhoods.”

Foster said to be prepared to pay more than the asking price.

“That’s why we are encouraging buyers, if they are able to buy now, to do it. Because the equity, you will see it increase so fast if you get in now while you can. Because the house you are looking at this year is going to be at least $50,000 more next year,” Foster said. “The truth is a lot of homes, most are selling for over asking, so $250,000 is just a starting point. So if you are really looking for a home and your approval is $250,000 then you probably need to look at $200,000, so that you have some wiggle room to write an offer that will win.”

Charlotte ranks No.5 in the rankings, Tampa comes in at No. 1, ahead of another Florida city at No. 2, Jacksonville.

https://abc11.com/raleigh-zillow-housing-market-top-10-markets/11425188/

This Is the Type of Market You Should Landlord in

Picking the right location to start your landlord business is essential. Find out how.

Key Points

• If where you live isn’t conducive to being a landlord, it’s probably better to choose a different market.
• Certain locations are more valuable than others.
• Network with other investors, like wholesalers and real estate agents.

The good news about being a residential landlord is you can buy property anywhere you like and still be successful. People who live in highly expensive cities with rent stabilization — New York, Los Angeles, and San Francisco, for example — shouldn’t have to invest in those towns.

It’s often a good idea to be a landlord close to home, but if home isn’t conducive to being a landlord, it’s probably better to choose a different market. But what sort of parameters should you use?

Location

Research conducted by Apartment Guide found that 62% of renters say location is more important than the actual rental unit.

And indeed, location is always the most important factor in real estate. You can’t change location, since land is immobile. The significance of this for investors is that the value of real estate is directly affected by its surroundings: Certain locations are more valuable than others.

When deciding which type of market to buy rental property, choose an area with traits desirable to renters:

• A healthy economy
• People moving to the area (demand)
• Job opportunities nearby
• New construction (determine this by contacting the local planning department)
• Low unemployment
• Affordability

Price

After location, renters look for a rental unit based on their budget. Although landlords can find renters looking to rent a high-end, expensive property, the market is smaller compared with the market for moderately priced homes.

Just look at the parameters iBuyers set for buying homes to guide you, as they have fancy algorithms that help pick investment property. Opendoor Technologies (NASDAQ:OPEN), for example, buys homes in affordable cities (usually avoiding the expensive coastal towns). It sets a price parameter of between $100,000 and $600,000, but it can be higher, depending on the market.

Vacancy rate

Nothing kills the bottom line faster for a landlord than vacancies. So it’s a good idea to find out the area’s vacancy rate. You can find this information by looking for rental units yourself online. This shows how many properties are listed and how long they’ve been sitting.

You could also ask area property managers which neighborhoods have a higher or lower vacancy rate. A high vacancy rate doesn’t necessarily mean you won’t be successful, but it warrants further investigation. If the location is in decline and the vacancy rate is high, for example, you should probably avoid the area.

Some good markets

Real estate investors have been focusing on the following markets for 2021. This is not a complete list. It’s given as a starting point as the sort of market to further investigate because of career opportunities, affordability, and population growth:

• Boise, Idaho
• Orlando, Jacksonville, and Tampa, Florida
• Dallas, Austin, and Houston, Texas
• Raleigh-Durham, North Carolina
• Atlanta

Tips to break into the landlord business

It’s tough to break into the landlord business today because the competition is high to buy investment property. You’re competing with institutional investors, iBuyers, and first-time homebuyers. It’s not impossible to find deals; it’s just harder. 

Source: The Motley Fool