What is a deferred like-kind exchange?

A deferred like-kind exchange refers specifically to a transaction under Section 1031 of the Internal Revenue Code that allows a taxpayer to defer paying capital gains taxes on the exchange of similar properties, provided certain conditions are met. In this context, the correct answer indicates that property is transferred before receiving the replacement property, which is a defining characteristic of this kind of exchange.

In a deferred like-kind exchange, the taxpayer sells their property and subsequently acquires a replacement property within a stipulated timeframe. The two key aspects are the deferment of tax obligations and the timing of the transactions, which allows for the deferral of gains. This structure helps investors in real estate and other assets continue to reinvest without immediate tax consequences.

The other choices represent different types of transactions that do not involve the specific tax-deferral mechanism or the timing requirements of a deferred like-kind exchange. A swap of similar properties, a cash-out exchange of assets, or an outright sale would not qualify for the same tax benefits as a deferred like-kind exchange, primarily because those activities do not follow the regulations set forth in the relevant tax codes for deferring capital gains taxes. The crux of a deferred like-kind exchange lies in the timing and the conditions that allow taxpayers to strategically manage their tax