April 7, 2025

Navigating Like-Kind Exchange Rules Under Section 1031

Article Summary:

This blog breaks down the rules and benefits of Section 1031 like-kind exchanges, a powerful tax deferral strategy for real estate investors. It explains how property owners can defer capital gains taxes by reinvesting proceeds into similar property, outlines key IRS requirements, and highlights common pitfalls to avoid. Whether you're a seasoned investor or exploring your first exchange, this guide offers practical insights to navigate the process confidently.

Legal Topics

EMPLOYMENT LAW UPDATE: FEDERAL TRADE COMMISSION ELIMINATES NON-COMPETE CLAUSES

On Tuesday, the Federal Trade Commission issued a new Rule putting an end to employment-related non-compete clauses. In its justification for the rule, the FTC called non-compete clauses “an unfair method of competition” and stated it is a “violation for [employers] to… enter into non-compete clauses (“non-competes”) with workers.” In today’s very competitive labor market, the new FTC Rule creates a significant disruption for employers.

WHEN IS THE FTC ELIMINATION OF NON-COMPETE CLAUSES SET TO TAKE EFFECT?

This new FTC provision—set to take effect in 120 days—renders existing non-compete agreements unenforceable. Existing non-compete agreements with senior executives will remain enforceable, although employers cannot require newly hired senior executives to sign such an agreement.

WHAT REQUIREMENTS HAS THE FTC IMPOSED ON EMPLOYERS BY ELIMINATING NON-COMPETE CLAUSES?

After the Rule takes effect, employers are required to deliver personal notice to employees (past and present) who signed a non-compete agreement informing them agreements are no longer enforceable. In the notice, employers must inform employees they are free to accept any job or start any business, even if it is directly competitive with the employer.

IS THE FTC’S ELIMINATION OF THE NON-COMPETE CLAUSES OPTIONAL FOR EMPLOYERS?

Compliance with the FTC Rule is not optional. Employers should consider new ways they can protect against a former employee gaining a competitive advantage by using the employer- provided training, the relationships made possible by the employer, or the confidential information learned from the employer. RMP can assist you in navigating this disruption and can provide advice on how to most effectively protect your vital business interests going forward.

RMP: Your Employment Law Attorneys

RMP Attorneys At Law has an experienced Employment Law Attorney team dedicated to helping you navigate these changes. If you have any questions or would like guidance, reach out to one of our employment attorneys, Tim Hutchinson, Seth Haines, Larry McCredy, or Taylor Baltz or call  479.443.2705.

For businesses and investors in Arkansas, understanding the rules surrounding like-kind exchanges under Section 1031 of the Internal Revenue Code (IRC 1031) is essential for maximizing tax benefits when exchanging investment or business properties. Our real estate attorneys are well-versed in the intricacies of 1031 like-kind exchanges and can help you navigate the legal framework to ensure compliance with applicable law.

Selling one property to purchase a new property with maximum tax benefits under IRC 1031, Section 1031 like-kind exchange.

What Is a Like-Kind Exchange?

A like-kind exchange, governed by IRC 1031, allows taxpayers to defer recognition of gain or loss, thereby reducing or eliminating capital gains taxes, when they sell real property held for productive use in a trade or business or for investment and replace it with another of like kind to be held for a qualifying business or investment purpose. This powerful tax-deferral strategy is commonly used in real estate transactions and can be structured in various ways, but it is subject to strict rules and requirements.

Key Like-Kind Exchange Rules

To take full advantage of a 1031 like-kind exchange, taxpayers must adhere to several necessary regulations:

Property Qualification

Only real property held for business or investment purposes and not held primarily for sale (e.g., inventory) qualifies for a like-kind exchange. Personal property and primary residences do not qualify. Both the relinquished property and the property received must be held for qualifying investment purposes, but the properties do not need to be held for the same purpose.

Like-Kind Requirement

The exchanged properties must be of like kind, meaning they must be of the same nature or character, even if they differ in grade or quality. For example, somebody could exchange an office building for an apartment complex or raw land for a rental property. This requirement stems from the policy underlying IRC 1031—when a taxpayer exchanges one qualifying property for another of like kind, he should not recognize gain or loss on the exchange because his economic position has not changed substantially.  In other words, the taxpayer is not divesting, but rather continuing an ongoing investment.

Timeline Compliance

Strict deadlines apply to a like-kind exchange:

  • 45-Day Identification Period: In a traditional forward 1031 exchange, the taxpayer must identify a replacement property within 45 days of selling the relinquished property. 
  • 180-Day Exchange Period: The exchange must be finalized no later than 180 days after the sale of the relinquished property in a traditional forward 1031 exchange.

Qualified Intermediary Requirement

A taxpayer cannot take possession of the proceeds from the sale of the relinquished property. Instead, a qualified intermediary must hold the funds until the new property is purchased.

Equal or Greater Value Rule

A property must be of equal or greater value than the relinquished property to entirely defer capital gains. If the new property is of lesser value than that of the relinquished property and the taxpayer receives cash or unqualified property, known as “boot,” to account for the difference, the taxpayer must recognize any gain generated by the exchange up to the value of the boot, which may partially or even fully destroy the benefit of deferred recognition under IRC 1031.

Examples of Like-Kind Exchanges

Understanding how a 1031 like-kind exchange works is easier with real-world examples:

  • Example 1: Commercial Real Estate Swap – A business owner in Arkansas sells a retail storefront and purchases a warehouse property. Because both properties are real estate held for a qualifying purpose, the exchange of these properties can qualify for nonrecognition treatment under IRC 1031, assuming the other requirements are met.
  • Example 2: Raw Land to Rental Property – An investor sells a vacant parcel of land and reinvests in a multi-unit rental property. Since both assets are real estate held for investment, this transaction meets the like-kind requirement even though the relinquished property is undeveloped and the property received is.
  • Example 3: Office Building for Apartment Complex – A company owns an office building but wants to shift its portfolio to residential real estate. It sells the office building and acquires an apartment complex. Again, because both properties are real estate held for investment purposes, the office building and apartment complex are considered to be like kind, and the transaction may qualify for nonrecognition under IRC 1031.

Benefits of a Like-Kind Exchange

A properly structured 1031 like-kind exchange can provide several benefits, including:

  • Strategic avenue for business growth and expansion
  • Deferred recognition of capital gains and immediate tax savings
  • Increased purchasing power for reinvestment
  • Opportunity for portfolio diversification

Contact RMP Law Today

Main RMP Number: 479-443-2705

Bentonville – 479-553-9800
Jonesboro – 870-394-5200
Little Rock – 501-954-9000

Message Us


Reverse Like-Kind Exchange

In addition to what is considered a traditional forward 1031 like-kind exchange, taxpayers can also complete a “reverse” 1031 like-kind exchange. In a “reverse” exchange, the replacement  or new investment property is purchased before the investment property currently held by the taxpayer is sold. Reverse exchanges are much more complex than a traditional forward exchange and require several additional steps to complete.

Consult Our Corporate Attorneys

The complexities of like-kind exchange rules require careful planning and legal guidance. Our Arkansas real estate attorneys specialize in Section 1031 transactions and can help structure your exchange to maximize tax advantages while ensuring compliance with IRC 1031 regulations. Contact us today to discuss how a 1031 like-kind exchange can fit within your business or investment strategies and benefit you.

Let RMP Law be your trusted legal partner, providing the guidance and advocacy you need to succeed. Contact us today! 

Main RMP Number: 479-443-2705

For businesses and investors in Arkansas, understanding the rules surrounding like-kind exchanges under Section 1031 of the Internal Revenue Code (IRC 1031) is essential for maximizing tax benefits when exchanging investment or business properties. Our real estate attorneys are well-versed in the intricacies of 1031 like-kind exchanges and can help you navigate the legal framework to ensure compliance with applicable law.

Selling one property to purchase a new property with maximum tax benefits under IRC 1031, Section 1031 like-kind exchange.

What Is a Like-Kind Exchange?

A like-kind exchange, governed by IRC 1031, allows taxpayers to defer recognition of gain or loss, thereby reducing or eliminating capital gains taxes, when they sell real property held for productive use in a trade or business or for investment and replace it with another of like kind to be held for a qualifying business or investment purpose. This powerful tax-deferral strategy is commonly used in real estate transactions and can be structured in various ways, but it is subject to strict rules and requirements.

Key Like-Kind Exchange Rules

To take full advantage of a 1031 like-kind exchange, taxpayers must adhere to several necessary regulations:

Property Qualification

Only real property held for business or investment purposes and not held primarily for sale (e.g., inventory) qualifies for a like-kind exchange. Personal property and primary residences do not qualify. Both the relinquished property and the property received must be held for qualifying investment purposes, but the properties do not need to be held for the same purpose.

Like-Kind Requirement

The exchanged properties must be of like kind, meaning they must be of the same nature or character, even if they differ in grade or quality. For example, somebody could exchange an office building for an apartment complex or raw land for a rental property. This requirement stems from the policy underlying IRC 1031—when a taxpayer exchanges one qualifying property for another of like kind, he should not recognize gain or loss on the exchange because his economic position has not changed substantially.  In other words, the taxpayer is not divesting, but rather continuing an ongoing investment.

Timeline Compliance

Strict deadlines apply to a like-kind exchange:

  • 45-Day Identification Period: In a traditional forward 1031 exchange, the taxpayer must identify a replacement property within 45 days of selling the relinquished property. 
  • 180-Day Exchange Period: The exchange must be finalized no later than 180 days after the sale of the relinquished property in a traditional forward 1031 exchange.

Qualified Intermediary Requirement

A taxpayer cannot take possession of the proceeds from the sale of the relinquished property. Instead, a qualified intermediary must hold the funds until the new property is purchased.

Equal or Greater Value Rule

A property must be of equal or greater value than the relinquished property to entirely defer capital gains. If the new property is of lesser value than that of the relinquished property and the taxpayer receives cash or unqualified property, known as “boot,” to account for the difference, the taxpayer must recognize any gain generated by the exchange up to the value of the boot, which may partially or even fully destroy the benefit of deferred recognition under IRC 1031.

Examples of Like-Kind Exchanges

Understanding how a 1031 like-kind exchange works is easier with real-world examples:

  • Example 1: Commercial Real Estate Swap – A business owner in Arkansas sells a retail storefront and purchases a warehouse property. Because both properties are real estate held for a qualifying purpose, the exchange of these properties can qualify for nonrecognition treatment under IRC 1031, assuming the other requirements are met.
  • Example 2: Raw Land to Rental Property – An investor sells a vacant parcel of land and reinvests in a multi-unit rental property. Since both assets are real estate held for investment, this transaction meets the like-kind requirement even though the relinquished property is undeveloped and the property received is.
  • Example 3: Office Building for Apartment Complex – A company owns an office building but wants to shift its portfolio to residential real estate. It sells the office building and acquires an apartment complex. Again, because both properties are real estate held for investment purposes, the office building and apartment complex are considered to be like kind, and the transaction may qualify for nonrecognition under IRC 1031.

Benefits of a Like-Kind Exchange

A properly structured 1031 like-kind exchange can provide several benefits, including:

  • Strategic avenue for business growth and expansion
  • Deferred recognition of capital gains and immediate tax savings
  • Increased purchasing power for reinvestment
  • Opportunity for portfolio diversification

Contact RMP Law Today

Main RMP Number: 479-443-2705

Bentonville – 479-553-9800
Jonesboro – 870-394-5200
Little Rock – 501-954-9000

Message Us


Reverse Like-Kind Exchange

In addition to what is considered a traditional forward 1031 like-kind exchange, taxpayers can also complete a “reverse” 1031 like-kind exchange. In a “reverse” exchange, the replacement  or new investment property is purchased before the investment property currently held by the taxpayer is sold. Reverse exchanges are much more complex than a traditional forward exchange and require several additional steps to complete.

Consult Our Corporate Attorneys

The complexities of like-kind exchange rules require careful planning and legal guidance. Our Arkansas real estate attorneys specialize in Section 1031 transactions and can help structure your exchange to maximize tax advantages while ensuring compliance with IRC 1031 regulations. Contact us today to discuss how a 1031 like-kind exchange can fit within your business or investment strategies and benefit you.

Let RMP Law be your trusted legal partner, providing the guidance and advocacy you need to succeed. Contact us today! 

Main RMP Number: 479-443-2705

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