Postpone taxes with this strategy
The tax law provides a valuable tax-saving opportunity to business
owners and real estate investors who want to sell property and acquire similar
property at about the same time. This tax break is known as a like-kind or
tax-deferred exchange. By following certain rules, you can postpone some or all
of the tax that would otherwise be due when you sell property at a gain.
A like-kind exchange simply involves swapping assets that are similar
in nature. For example, you can trade an old business vehicle for a new one, or
you can swap land for a strip mall. However, you can't swap your vehicle for an
apartment building because the properties are not similar. Certain types of
assets don't qualify for a tax-deferred exchange, including inventory, accounts
receivable, stocks and bonds, and your personal residence.
Typically, an equal swap is rare; some amount of cash or debt must
change hands between two parties to complete an exchange. Cash or other
dissimilar property received in an exchange may be taxable.
It is not necessary for the exchange of properties to be simultaneous. However,
in the case of such a delayed exchange, the replacement property must be
specifically identified in writing within 45 days and must be received within
180 days (or by your tax return due date, if earlier), after sale of the
exchange property.
With a real estate exchange, it is unusual to find two parties whose
properties are suitable to each other. This isn't a problem because the rules
allow for three-party exchanges. Three-party exchanges require the use of an
intermediary. The intermediary coordinates the paperwork and holds your sale
proceeds until you find a replacement property. Then he forwards the money to
your closing agent to complete the exchange.
When done properly, exchanges
let you trade up in value without owing tax on a sale. There's no limit on the
number of times you can exchange property. If you would like to learn more
about tax-deferred exchanges, contact us.
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