Taxpayers pay a tax when they sell their business or investment property, and realize a gain on the sale. However, if the property is exchanged for “like-kind” business or investment property, the gain on the sale of the property will be deferred.
Like-kind property is defined broadly. Exchanging a rental property for another rental property, or exchanging personal property (non-real estate) for other personal property (such as trading in one business automobile for another business automobile) will generally qualify. However, if the properties involved are not of equal value, and you receive boot, such as cash in the exchange (which also includes being relieved of debt on the original property, you will have to recognize tax on the boot received, to the extent of gain).
Like-kind exchanges do not have to be made simultaneously, but the rules regarding “deferred” like-kind exchanges are complex. This usually happens with the exchange of real estate. There is a deadline for identifying the replacement property within 45 days after the date you sell your original property. In addition there is another deadline that the closing for the replacement property must occur within 180 days after the date you sell your original property. During this interim period, the cash proceeds from the sale of the exchanged property must be held in escrow by a qualified intermediary, who must be an unrelated party to the seller.
In all cases, the depreciable basis of the new property acquired in the like-kind exchange will equal the purchase price of the property, less the amount of the gain on the exchange that is being deferred. Please note that like-kind exchanges do not involve the exchange of securities, inventories, partnership interests, or items used for personal purposes (such as a primary residence or a vacation home).
If you have any questions about like-kind exchanges, we can help you navigate through these confusing IRS regulations. Please contact Andrew Ross, CPA at Bedard, Kurowicki & Co., CPA’s at (908) 782-7900 x 113 or email firstname.lastname@example.org.