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.