Section 1031 of the Internal Revenue Code defers taxes on like-kind exchange of properties, but what exactly qualifies as “like-kind?” By legal definition, “like-kind” means that two properties or assets involved in the exchange are of the same nature. If you don’t want your gains to be subject to capital gains tax, you need to exchange the property for another property. Don’t worry about the quality; as long as they are both properties, you’re good.
Aside from exchange, there’s also another way to benefit from a 1031. If you reinvest the gains in the sale of your property on another property, you also qualify for tax deferral on capital gains. However, it still has to be like-kind, so you can’t reinvest the gains in the sale of your property to a car and vice-versa. In addition, keep in mind that the deferral only lasts for the whole tax year, so you need to keep on reinvesting on like-kind property if you want the deferral to last longer.
Even if the properties are like-kind, Section 1031 only caters to properties and assets for productive use in trade or business. Residential homeowners, however, qualify for a 1031 as long as they turn their home into a business (e.g. rental). With this, properties and assets bought for personal use don’t qualify for a 1031.