when a commercial property or investment property is sold for a gain the investor is required to pay a capital gains tax on the profit earned all capital gains are taxed at either the short term capital gains rate between 10 to 37 for profits made on a sale within one year or the long term rate which falls between 10 to 20 for profits made on a sale after one year of the initial purchase date 
a like kind exchange is also known as a 1031 exchange or a starker exchange however section 1031 of the internal revenue code irc exempts an investor from making a tax payment on a gain if the proceeds from the sale or disposal of the property are reinvested in a similar property of equal or greater value as part of a qualifying like kind exchange any real estate except for one s own personal residence is considered like kind to any other real estate generally any real estate property held for productive use in the trade or business or for investment qualifies for a like kind exchange a taxpayer that sells a piece of investment property and buys another within a stipulated time limit will not have to pay tax on the first disposal they will have to pay tax upon sale or disposal of the second property unless another like kind exchange is done in which case the tax payment will be deferred again there are several important considerations to keep in mind with a like kind exchange to ensure that a tax liability is not created upon the sale of the first asset there are some limitations on the amount of capital gain that is tax deferred so ensure that you check the latest tax rules before proceeding with a like kind exchange special considerationsin addition to the tax deferral benefits a like kind exchange allows the seller to defer their depreciation recapture the gain received from the sale of depreciable capital property that must be reported as income for income tax purposes a taxpayer can also avoid state taxes on like kind exchanges for example some states require that either a buyer or seller pay state income taxes when a property is sold known as state mandatory withholding property transferred in a like kind exchange however can receive an exemption to claim the exemption the taxpayer will need to sign an exemption form or certificate provided by the state some states require the seller to submit the exemption 20 days before closing while other states may allow the exemption form to be submitted at closing advantages and disadvantages of a like kind exchangethe most glaring benefit of a like kind exchange is the favorable tax treatment under this exchange an asset can be replaced with a like kind asset without triggering a taxable event the exchange need not be with an asset identical to the one being replaced it must be in the same asset class the irs sets no limit on how often someone can do a 1031 exchange so investors can continuously look for more lucrative opportunities also money that would have been used to pay capital gains taxes is available for reinvestment although a like kind exchange offers tax benefits they are temporary taxes are deferred not eliminated at some point capital gains taxes will be due also if the exchange does not take place within the prescribed period or according to irs rules the transaction will become taxable just as capital gains taxes are deferred so are losses a like kind exchange that includes losses must be carried forward tax deferral of capital gainsmore money to reinvestno limit on number of exchangesstrict irs rules and regulationslosses are deferredtax obligation remainsexample of a like kind exchangea like kind exchange is ideal for a business owner looking to sell their business and invest in another one or a real estate investor looking to sell a rental property and buy a similar one an 8824 form must be filed with the internal revenue service irs detailing the terms of the deal gain recognized because boot cash liabilities or other property that is not like kind and that is given or received in a like kind exchange was received is reported on form 8949 schedule d form 1040 or form 4797 as applicable if depreciation must be recaptured then this recognized gain may have to be reported as ordinary income like kind exchange faqsthe third party intermediary or qualified intermediary fulfills documentation requirements and ensures that sales proceeds are held until the exchange is complete and that the exchange adheres to irs guidelines given the complexity of these transactions there are advantages to working with a full service 1031 exchange company with an established track record for a successful like kind exchange that straddles two years the taxpayer will report the transaction on irs form 8824 1 the exchange will be reported for the year in which the exchange began for exchange funds received in the next tax year the taxpayer will report those proceeds on irs form 6252 for a failed like kind exchange that straddles two tax years the taxpayer may be required to report any gains under the installment method 2 even though they don t qualify for the like kind exchange they still may be able to defer gains for one year a loss is not realized until the transaction becomes taxable 3 under a like kind exchange capital losses are tax deferred just like capital gains are the bottom linea like kind exchange offers favorable tax benefits to those who qualify taxpayers can continue to defer capital gains tax indefinitely and have no limits on how often they can perform like kind exchanges the irs sets strict guidelines on what can be exchanged and when despite its benefits taxpayers must be aware that losses under a like kind exchange are deferred and taxes are not avoidable 