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What Does “Like-Kind” Really Mean Anyway?

This question was recently raised in the University of Illinois Tax School Facebook Group and addressed in the September 29, 2022, agriculture update webinar entitled New Twists on Tax Strategies for Farm Taxpayers, held by the Tax School. The question concerned whether dissimilar types of real estate could be involved in an IRC §1031 exchange. Because it took the IRS 19 pages to answer this question and a few related ones in December 2020, we would like to share a summary with our readers. Treasury Decision 9935, also addresses a more fundamental question: what is “real estate” anyway?

Section 1031 doesn’t answer this question. The authors of the Treasury Decision went back to the discussion in the House of Representatives when it considered the Tax Cuts and Jobs Act (TCJA) in 2017. Based on the conference report from the House, the authors of the Treasury Decision determined that Congress didn’t want to make any changes to the definition of real estate that was eligible for like-kind exchanges. They considered that if some real estate qualified before TCJA, it was fine with Congress if that type of real estate continued to be eligible.

But this begs the question of what was eligible before TCJA. Congress punted the ball to state law, so if state law considered some object real estate, that was fine for Congress, provided that the real estate was located in that state. Here’s where the new Treasury Regulation steps in. Treas. Reg. §1.1031(a)-3 became effective for like-kind exchanges taking place after December 2, 2020, and says that real estate:

means land and improvements to land, unsevered natural products of land, and water and air space superjacent to land.

It includes “inherently permanent structures and their structural components,” to quote the regulation itself. Real estate might also have intangible assets connected to the land. The regulation provides examples of a leasehold or an option to acquire real estate, as well as the fee interest in the real estate itself.

Property in Foreign Countries Is Not Like-Kind with U.S. Property

Interestingly, “like-kind” means anything else that might be considered real estate, but only if it is located in the United States. Section 1031 makes it clear that property within the United States is not regarded as like-kind with property outside the United States. Because only the fifty states and the District of Columbia are considered the United States, U.S. territories are not included. As a result, if a taxpayer wants to exchange farmland in Illinois with farmland in Puerto Rico, they are out of luck.

Nevertheless, they could exchange the Illinois farmland for a mineral interest in Texas or a marina in Alabama. Illinois farmland is clearly real estate, and the mineral interest in Texas qualifies as real estate because it satisfies the test as being the unsevered natural product of land. The marina corresponds closely to an example in Treas. Reg. §1.1031(a)-(3)(b)(2). It does not matter that farmland is not the same as a mineral interest or as a marina at a lake.

How Depreciation Recapture Can Affect Like-Kind Exchanges

Apart from the possible inclusion of boot in an exchange, recapture of depreciation may affect a like-kind exchange, resulting in payment of some tax. Depreciation recapture happens if the §1031 exchange involves trading properties covered by different depreciation recapture rules. This can result in tax surprises arising from an otherwise tax-free exchange.

Consider another example based on the New Twists on Tax Strategies for Farm Taxpayers webinar discussion. Suppose our client acquires in a §1031 exchange one piece of land with a building that qualifies for IRC §1250 treatment while relinquishing real property that qualified for IRC §1245 treatment. This real estate might include a single-purpose horticultural building like a specialized greenhouse. Our client would have to recapture depreciation on the property they are relinquishing, subject to §1245(b)(4). If the property exchanged has dissimilar depreciation rules, then depreciation or depletion recapture is required. This recapture might also occur if depreciation or depletion is associated with the property under IRC §§1251, 1252, 1254, or 1255.

An Agricultural Example

Consider another following example from the webinar. Two farmers exchange parcels of land, each with a hog building worth $150,000. Both farmers claimed 100% bonus depreciation on their buildings, which qualified for §1245 treatment. Because the land and the buildings are of the same value and type with the same recapture rules, no recapture is involved, and no taxable gain is recognized. In the hands of either farmer, each building has a basis of $0.

In contrast, two farmers exchanging different types of buildings on their property might not be so fortunate. Consider farmer #1, who acquired land with a multipurpose farm machine shed in 2019 when the building alone was worth $150,000. The farmer elected 100% bonus depreciation in that year. In 2025, the farmer wants to exchange the land and the machine shed for a new parcel of land owned by farmer #2. This new parcel of land has a single-purpose livestock building; this building is worth $150,000, coincidentally the same amount as the market value of the machine shed. Farmer #1 would have two portions of depreciation to consider in their planning.

      1. Because straight-line depreciation would have been $44,700 on the machine shed, this amount would be considered unrecaptured 1250 gain, eligible for tax deferral.
      2. The additional depreciation amount, $105,300, would be considered §1245 depreciation recapture and included as taxable gain as a portion of the like-kind exchange. Thus, the farmer would incur tax on this amount, leaving them with a basis in the new livestock building of $105,300. This amount could be recovered under regular depreciation, bonus depreciation, or IRC §179 provisions and perhaps offset the taxable gain from depreciation recapture.

As emphasized in the webinar, farmer #1 would most likely not benefit enough from the like-kind exchange (at least to the extent of the building values) to proceed. This example illustrates how, in many cases, like-kind exchanges are beneficial, but not in all cases. Like-kind exchanges that require depreciation recapture often require careful analysis to determine if they are truly beneficial.

By John W. Richmann, EA, MBA
Tax Materials Specialist, U of I Tax School


85 Fed. Reg. 77,365 (Dec. 2, 2022).

H.R. Conf. Rept. 115-466, at 396, fn.726 (2017).

IRC §7701(a)(9).

Treas. Reg. §1.1031(a)-3(a)(3).

IRC §1245(a)(3)(D).

IRC §§1245(b)(4) and 1250(d)(4).

Disclaimer: The information referenced in Tax School’s blog is accurate at the date of publication. You may contact if you have more up-to-date, supported information and we will create an addendum.

University of Illinois Tax School is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this site is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information. This blog and the information contained herein does not constitute tax client advice.

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