What is a like-kind exchange?

The two tests the property must pass

Publication 544 says a like-kind exchange needs two things: the property given up and the property received must both be qualifying property and both be like-kind. Qualifying property is real property, as the regulations define it, held for investment or for productive use in your trade or business and not held primarily for sale. Like-kind means the same nature or character, even if the grade or quality differs, so real estate for real estate qualifies. The publication gives city property for farm property, and improved property for unimproved property, as examples of like-kind real estate.

What is excluded, including trade-ins

The publication lists three exclusions: real property used for personal purposes such as your home, real property held primarily for sale, and any personal or intangible property that is not an interest in real property. That last item is why a trade-in does not qualify. Pub 544 does not use the word trade-in; it simply limits the rules to real property. When you trade a truck or a machine toward a new one, the old asset is therefore a sale at its value and the gain or loss is figured the ordinary way. The publication also says partnership interests do not qualify as like-kind property, and that exchanging the assets of one business for the assets of a similar business is analyzed asset by asset.

Real estate leases can qualify in some cases. The publication states that exchanging real estate you own for a lease that runs 30 years or longer is like-kind, while a life estate expected to last less than 30 years traded for a remainder interest is not. Real property in the United States and real property outside it are not like-kind to each other, so swapping foreign real estate for U.S. real estate triggers recognized gain or loss.

The 45-day and 180-day clocks

If you do not receive the new property at the same time you give up the old one, you have a deferred exchange, and two deadlines apply. You must identify replacement property in a signed written document within 45 days after you transfer the property you gave up. You can identify up to three properties regardless of value, or any number whose total fair market value is not more than double the value of what you gave up. The replacement must be received by the earlier of the 180th day after the transfer or the due date, with extensions, of your return for the year of the transfer. If you actually or constructively receive the sale money before the replacement arrives, the deal is treated as a sale rather than an exchange.

Cash and other property: how boot is taxed

If you receive money or non-like-kind property along with the real estate, the exchange is partially nontaxable. Gain is recognized, meaning taxable, in the smaller of two amounts: the gain you realized, or the money plus the fair market value of other property you received, reduced by exchange expenses you paid. A realized loss is not recognized in a like-kind exchange. Liabilities matter too: if the other party takes over your mortgage, you are treated as receiving money in that amount, though you can reduce it by liabilities you assume and by cash you add.

Worked example from the publication

The publication trades investment real estate with a fair market value of $110,000 and an adjusted basis of $80,000 for other investment real estate worth $100,000 plus $10,000 in cash, with $5,000 of exchange expenses. Total received is $110,000, less the $5,000 expenses, giving an amount realized of $105,000. Subtracting the $80,000 basis gives a realized gain of $25,000. The recognized gain is only $5,000, which is the $10,000 cash minus the $5,000 expenses. The other $20,000 is deferred. Enter those numbers above to reproduce the result. The calculator ignores liabilities, so use it for exchanges without mortgage relief and treat the output as an illustration.

Basis, reporting, and related parties

Generally, the basis of the property you receive is the basis of the property you gave up, increased by any money you paid. In the publication, real estate with a $225,000 basis traded for other real estate carries that same $225,000 into the new property. Report the exchange on Form 8824 even if no gain is recognized, and report any recognized gain on Form 8949, Schedule D, or Form 4797 as applicable. If any of the gain comes from depreciation, it can be ordinary income. A related-person exchange adds a two-year rule: if either person disposes of the property within 2 years after the exchange, the original exchange loses nonrecognition and the deferred gain is recognized when the later disposition happens. Related persons include family members and, for example, a corporation in which you own more than 50%.

Mistakes to avoid

The usual errors are treating equipment or vehicle trades as like-kind, letting sale proceeds sit in an account you can draw on, missing the 45-day written identification, and forgetting that cash received or a mortgage you are relieved of can create taxable gain. Exchange expenses are generally closing costs such as brokerage commissions, attorney fees, and deed preparation fees, but property taxes, rent prorations, security deposits, and repairs on the closing statement are not exchange expenses. Because mistakes cannot be undone after the deadlines pass, confirm the structure with a qualified tax professional before you transfer the first property.

Related Publication 544 topics

More from the same IRS publication: What is an involuntary conversion?, What is Section 1231 property?, What is the long-term holding period?. Related tools on this site: 1031 exchange deadline calculator, depreciation recapture calculator.

Sources

• IRS Publication 544, Sales and Other Dispositions of Assets (2025): sections “Like-Kind Exchanges”, “Qualifying Property”, “Like-Kind Property”, “Deferred Exchange”, “Partially Nontaxable Exchanges”, “Like-Kind Exchanges Between Related Persons”. Read November 2, 2026.

Edition read: Publication 544 (2025), for use in preparing 2025 returns. Dollar limits and rates in this publication are for 2025; the publication notes that later legislation (P.L. 119-21) may affect federal rules, so check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it. Marked for human review.