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What is Like Kind WHAT IS THE DEFINITION OF LIKE-KIND,
FOR SECTION 1031 TAX CODE PURPOSES
Section 1031 States that no gain or loss shall be recognized, or taxed, if the property held for productive use in trade or business or held for investment is exchanged solely for property of a like-kind to be held for investments, or for productive use in trade or business.
The definition of like-kind is crucial, in that like-kind does not mean that the seller of a mineral interest has to buy another mineral interest. Many people think a sale of mineral interest must be followed by the purchase of another mineral interest. This is not the case, and the definition of like-kind is much broader, which allows sellers to re-invest in other categories of qualifying properties. For example, all real estate in the United States is considered to be like-kind to any other domestic real estate, as long as each property qualifies for the proper use. The only requirement to meet the qualifying use standard is that the property is held for use in trade or business or for investment. Holding a property for appreciation constitutes “holding for investment. Thus, mineral interests that have been held for investment (not purchased for imminent sale after they were acquired) can be sold as part of a 1031 exchange, and the proceeds can be used to purchase a ranch, multi-family rental property, commercial building, undeveloped land, resort investment property, and so on. The following are examples of valid exchanges:
• Overriding royalty for unimproved real estate
• Mineral interests for an investment resort property
• Interest in a producing oil lease extending until the exhaustion of the deposit for a ranch property
• Perpetual water rights for a fee interest in land
• All the above can be interchanged, and the properties can be in different states.
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