Like-Kind Exchanges

We have reviewed your tax information and would like to take this opportunity to describe a very important tax planning arrangement for the selling and buying of similar real property assets. This planning arrangement is commonly called a "like-kind exchange." Like-kind exchanges generally allow owners to postpone the recognition of gain on the disposition of real property held for business or investment. The tax savings from participating in a like-kind exchange can be substantial.

A like-kind exchange provides a wonderful alternative to selling property outright. The sale of property may cause you to recognize and pay taxes on any gain on the sale. A like-kind exchange, on the other hand, allows you to avoid gain recognition through the exchange of qualifying like-kind properties. The gain on the exchange of like-kind property is effectively deferred until you sell or otherwise dispose of the property you receive in the exchange.

The IRS allows this tax-deferred transaction because it recognizes that you shouldn’t be taxed on a gain when your economic position remains the same (because you have merely exchanged one property for another). You will, however, have to recognize gain on any cash or unlike property that you receive in the exchange.

Only qualifying property may receive like-kind treatment. To qualify, both the real property you give up and the real property you receive must be held by you for investment or for productive use in your trade or business. Buildings, rental houses, and land are examples of property that may qualify.

Like-kind exchanges provide a valuable tax planning opportunity if:

    • You wish to avoid recognizing taxable gain on the sale of property that you will replace with like-kind property;

    • You wish to diversify your real estate portfolio without tax consequence by acquiring different types of properties with the exchange proceeds;

    • You wish to participate in a very useful estate planning technique (continued like-kind exchanges allow you to permanently avoid recognition of gain); or

    • You would generate an alternative minimum tax liability upon recognition of a large capital gain in a situation where the gain would not otherwise be taxed. (The like-kind exchange shelters other income from the alternative minimum tax).

If you would like more information on like-kind exchanges, or if you feel that you may benefit from a like-kind exchange, please contact our office at your convenience so that we may discuss this in greater detail.