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Q. What is a like kind exchange?
A. In its purest form, a like kind exchange trading one
property for another similar property, for example, a house worth $75,000.00 for
another house worth $75,000.00. You would not pay tax on such a trade, or
exchange.
Straight trades are rarely practical. Under IRC 1031, you are allowed to
perform a deferred like kind exchange. Assuming the transaction is correctly
structured, this permits you to, in effect, sell one property, have the proceeds
of the sale held for you, and then use them to buy a new property. If the
transaction is properly structured as a deferred like kind exchange, you do not
pay any tax on it, just as if it was a straight swap of two like kind
properties.
To do a deferred exchange, you will have to "identify" the
replacement property within 45 days of when you sell the relinquished property,
and you will have to acquire the replacement property within 180 days of when
you sell the relinquished property. "Identification" is a highly
technical term and must be done correctly.
IRC 1031, and the IRS Regulations concerning exchanges, make it possible to
defer, and sometimes entirely avoid, paying capital gains tax on a transaction.
Since capital gains are now taxed at historically very high levels, like kind
exchanges are an important device for real estate investors to know about.
It is important to remember that it is not enough for the contract to say
something like "this is a like kind exchange," as the transaction must
be fully structured as an exchange, or it will not qualify for exchange
treatment. Get sound advice from a licensed professional!
Rice & Stallknecht, P.C. would be honored to
assist you.
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