Can a Like-Kind Exchange Lower My Current Tax Bill?
Like Kind Exchanges allow investors to buy and sell certain types of investment assets without paying capital gains taxes at the time of the sale. The tax, which would normally be due, is instead rolled over into the newly purchased property. The tax code contains specific rules for like-kind exchanges, which must be followed in order to defer taxation. Like-kind rules generally speaking apply to investment assets, such as real estate, but do not apply to items such as personal property, primary residences, second homes, and inventory.
"For those who desire to pursue a like-kind exchange, I suggest that you seek out and obtain a professional who handles these types of transactions on a full-time basis. Failure in any aspect of the nuances of the law as detailed will make the exchange null and void, leaving all or part of the gain taxable."
— John Dillard CPA Proudly Serving Duluth/Gwinnett/Metro Atlanta and Beyond
There are many specific guidelines of which I have recapped a few below:
General Rules of a Like Kind Exchange
- You cannot touch any of the cash proceeds or to the extent that you do they will become taxable.
- You have to have held the property you are selling as an investment (i.e., the selling item can not be an item that you have in inventory). If you cannot document that this item was owned by you personally, as an investment, then the like kind rules would not apply.
- To the extent you do not re-invest the full sales price you will have a pro-rata gain (i.e., if you sell an item for $500 that had a tax basis of $400 (therefore a $100 gain) and you bought an item for $150 then you would have to recognize a gain as follows: (350 of sales price not invested divided by $500 total sales price times 100 total gain equals $70 of gain has to be recognized).
- If you have a like kind exchange between two related parties then both parties to the transaction
have to hold the property have to hold the assets for two years or the like kind exchange is voided and the gain recognized in the year transaction voided (i.e., transferred early).
Learn how we can enlighten you in this strategic piece of tax law helping to understand how you can legally defer taxes to another day. Call us today so that we might get started on helping you and your investment decisions.