Deferring Taxes with a Like-Kind Exchange
If you would like to trade one property for another and potentially save some taxes in the process, you may want to consider a like-kind exchange.
The like-kind exchange rules permit owners to trade certain appreciated property held for investment or for use in a trade or business for similar like-kind property without recognizing taxable gain. Instead, the owner transfers his or her basis (generally, the cost of the original property, plus improvements) to the new property.
Let's look at a hypothetical example. Jane has an empty real estate parcel she originally bought for $100,000. The parcel is now worth $130,000. She would like to trade it for a parcel that Bill owns, also worth $130,000, because she believes his property has more potential. With a like-kind exchange, Jane may exchange her property for Bill's without being taxed on the $30,000 of appreciation on her property, and her original cost basis of $100,000 will be transferred to the acquired property.
Several restrictions apply. First, the properties exchanged must be of a like kind. However, this requirement is broadly defined, so exchanges of real estate or of personal (non-real estate) property will generally qualify. However, certain property won't qualify, such as inventory and securities. If the exchange involves cash or other non-qualifying property, the receiving party will generally have to recognize gain to that extent.
Additionally, if the exchange is with a "related party" (generally, certain family members or a greater-than-50%-owned corporation or partnership), gain must be recognized if the acquired property is disposed of within two years.
As each individual's tax circumstances are different, contact us to discuss your personal situation.