What is ‘like kind’ where leasehold is concerned?



Thinking about exchanging your investment property? Knowing what ‘like kind’ means is crucial to successfully deferring your tax burden. As a general rule, real estate for real estate, regardless of zoning, is a fine trade. In other words, if you trade your investment condo (residential) for a five-unit apartment building (apartment), you’re fine.

But trying to swap different land-tenured properties will get you nothing but a bitter taste in your mouth and a failed exchange. For example, if you trade the same condo wherein the land tenure is leasehold (with less than 30 years left) but the building’s is fee simple, the IRS will not allow code 1031 to apply. The IRS does consider leasehold properties with at least 30 years remaining on the lease to count as ‘like kind’ for fee simple property.

The leasehold rule goes a bit further, stating that lessors can’t exchange lease for fee but lessees can; in other words, as long as you’re not the fee owner of a leasehold property, you can exchange your leasehold property as long as the lease term qualifies. The 30-Year Rule applies to other terminable interests, too (life estates, for example and estates for years, for example).

Leasehold property is an ever-present factor in our Hawaiian real estate market, so being aware of how this rule functions is really important if you own or are thinking of purchasing leasehold property. The first property I ever purchased was leasehold, and I made $150,000 when I sold it, so I know from experience that lots of great deals can be had as long as you know the rules. Email me at christinalow@mac.com or visit my website at http://www.commercialinvestmentstrategies.com if you’re interested in finding out more about Hawaii’s unique real estate market.

*Interesting note* Foreign properties don’t usually qualify, even if they are in U.S. territories or commonwealths, with the exception of Guam and the Northern Mariana Islands (26 C.F.R. 1.935-1).