Tax-Free Exchanges of Property
You may not have to pay tax on gain realized on the "like-kind" exchange of business or investment property. Gain may be taxed upon a later disposition of the property because the basis of the property received in the exchange is usually the same as the basis of the property surrendered in the exchange. If the exchange involves the transfer of boot, such as cash or other property, gain on the exchange is taxable to the extant of the value of the boot.
However, the loss is not deductible unless you give up "unlike" property.
The term "like-kind" refers to the nature or character of the property, that is, whether real estate is traded for real estate. It does not refer to grade or quality. In the case of real estate, land may be traded for a building, farmland for city lots, or a leasehold interest of 30 years or more for outright ownership in realty.
