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Simple English definitions for legal terms
like-kind property
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A quick definition of like-kind property:
Like-kind property refers to a type of property that can be used in a 1031 exchange to delay paying taxes on capital gains. Normally, when you sell an investment property, you have to pay taxes on any profit you made. But with a 1031 exchange, you can use the money from selling your property to buy a new property that is similar in type and value, and you won't have to pay taxes on the profit until you sell the new property. The new property has to be chosen within 45 days and purchased within 135 days, and it has to cost the same amount or more than the original property. Only real estate can be used in a 1031 exchange, and personal residences don't qualify.
A more thorough explanation:
Definition: Like-kind property refers to property that meets the requirements of a 1031 exchange, which allows investors to defer capital gains taxes by reinvesting the proceeds from the sale of an investment property into a new, similar investment property.
For example, let's say an investor sells a rental property for $500,000 and has a capital gain of $100,000. Normally, they would owe taxes on that gain. However, if they use the proceeds to purchase another rental property within a certain timeframe, they can defer paying those taxes.
The new property must be considered "like-kind," which means it must be similar in nature and use to the original property. This can include any type of real estate used for investment purposes, such as rental properties, commercial buildings, or undeveloped land.
It's important to note that the new property must be identified within 45 days of the sale of the original property, and the purchase must be completed within 135 days. Additionally, the new property must be of equal or greater value than the original property.
Overall, like-kind property is a valuable tool for investors looking to defer capital gains taxes and reinvest in similar properties.