Like-Kind Exchanges

Normally, whenever you sell a business or investment property and you have a gain, you pay tax on the gain at the time of sale, even if you plan on reinvesting the proceeds in another property.

 

Not so when you choose to exchange, not sell, your property for a similar property. Such exchanges, called a like-kind exchange, allow you to postpone paying tax on the gain until a later time.

 

But you have to know what qualifies for an exchange. Below are four conditions you need to know about:

• You must exchange your property, not sell it, for another one.
• You must hold both the property traded and the property received for business or investment purposes. 
• The properties must be of similar nature, character, or class, regardless of quality or grade. For example, improved real estate can be traded for unimproved real estate.  
• The properties cannot be certain excluded property, including stocks, bonds, notes, securities, evidences of debt, or partnership interests. In addition, the properties must not be held primarily for sale.

The big benefit? Although you will eventually be responsible for paying tax on both the original deferred gain and on gain realized in the interim, by deferring the tax, you can immediately apply all of the appreciation in your property, undiminished by the tax that would otherwise be payable, toward acquiring replacement property.

 

I can help you thoroughly understand like-kind exchanges and choose whether a “simultaneous” exchange or a “deferred” exchange will benefit you the most. Both have their advantages and disadvantages but should be chosen carefully based on your particular circumstances. In addition, structuring like-kind exchanges can be complex, but the tax deferral is often worthwhile.

 

I welcome the opportunity to evaluate your personal situation. Please contact me to set up a consultation to discuss your needs and how I can help you.

What Tax Records to Keep and for How Long

Filing your taxes isn't just a once-a-year endeavor. Maintaining good records throughout the year—and disposing of old ones when appropriate—not only provides you with greater confidence now when you prepare your tax return, but it also provides you with documentation you may need down the road.

 

Lucky number six. One of the most common questions I'm asked is, how long should I keep my tax returns? Although you can get away with keeping them only three years, I recommend you keep all federal and state income tax returns and supporting documents for a full six years.

 

Why so long? Once you've filed your returns, the IRS has up to three years to assess additional taxes. However, it can take up to six years to make a tax assessment if it determines that you omitted a substantial amount of income from your return. You may believe your returns are accurate and all-inclusive, but the IRS may feel differently.

 

Be sure to file your U.S. Postal Service or electronic mailing receipts with your returns, too. If your return is ever lost or misplaced, having a receipt showing the date the return was submitted will save you from penalties.

 

File it, but don't forget it. Some events produce documentation that should be kept permanently: settlement records from all of your home purchases and sales, investment purchases, divorce agreements, etc.

 

But just because an event ends doesn't mean that the documentation process should. Before you move your records to the attic, remember that regularly filing “updates”—home improvement receipts, records that show a return of capital on your investments, estate and gift tax returns under which you received property, etc.—will help to compute your gain/loss when you sell.

 

There are other situations in which you would benefit from keeping records, including any nondeductible contributions you have made to an IRA or Roth IRA. Review your personal and financial history with a professional to ensure you have all your bases covered.

 

So, how complete are your files?

 

I welcome the opportunity to discuss your personal situation. Please contact me to set up a consultation where we can discuss your tax needs and how I can help you.