LIKE-KIND EXCHANGES AND TAX DEFERRAL BASICS

If you own a property that you intend to sell for a gain, you may be able to avoid owing any current capital gains tax by swapping the property in a “like-kind exchange” instead of selling it for cash.  With such exchange, you defer owing tax on gain until you sell the property received in the swap.  Alternatively, you can dispose of that property in a like-kind exchange and create a series of such exchanges that can defer taxable gain indefinitely.

Like-kind exchanges can be used very effectively defer gain recognition (reduce taxes).  Taxable gains could be recognized when you are in a lower tax bracket, have offsetting losses, or ultimately deferred altogether.  Upon death, your heirs take property with a stepped-up basis that eliminates all gain.

Basic rules

·        The property disposed of must be either a business or investment property-it can’t be personal-use property (such as your car or home) or business inventory.

·        If the property is equipment, it must be traded for property of a similar kind-such as a vehicle for a vehicle, not a vehicle for computing equipment.

·        It the property is real estate, it can be exchanges for real estate of another kind-such as a building or raw land.

·        One problem may be finding a satisfactory property to swap for-but brokers can arrange swaps and three-way exchanges are permitted, making it easier find a swap partner.

Note: Any cash received in an exchange and not used to purchase replacement property will be taxable gain.

Many other technical rules also apply, so please contact us for further information.