– A like-kind exchange can be used to defer tax on the gain from selling commercial or investment real estate that has appreciated significantly.
– It involves exchanging the property rather than selling it, allowing taxpayers to defer paying taxes on the gain.
– Like-kind exchanges are limited to real property held for investment or for productive use in a trade or business, and the replacement property must also be for investment or business purposes.
– The definition of like-kind is broad when it comes to real property, but property held primarily for sale does not qualify.
– It’s important to note that as of December 31, 2017, tax-deferred Section 1031 treatment is no longer allowed for exchanges of personal property, such as equipment and certain personal property building components.
– Individuals should seek professional advice if they are unsure whether the property involved in their exchange is eligible for like-kind treatment. 1. In a straight asset-for-asset exchange, no gain needs to be recognized.
2. If cash or other property is included in the exchange, it is called “boot.”
3. If boot is involved, the taxpayer will have to recognize their gain, but only up to the amount of boot received.
4. The basis in the replacement property is equal to the basis in the relinquished property, reduced by the amount of boot received and increased by any recognized gain.
5. If the property being exchanged is subject to debt relief, the amount of the debt is treated as boot.
6. Like-kind exchanges can be a tax-deferred way to dispose of investment, trade, or business real property. – Tax Insights is published weekly
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– For any questions, contact taxinsights@nksfb.com
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