Tax-deferred property exchanges are 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 property 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.
Since 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's not necessary for the exchange of properties to be simultaneous. However, in the case of a "deferred" exchange, the replacement property must be specifically identified in writing within 45 days and must be acquired within 180 days (or by tax return due date, if earlier), after transfer of the exchange property.
With a real estate exchange, it's often unusual to find two parties whose properties are suitable to each other at the same time. This is easily solved because the rules allow for three-party exchanges which require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property from a third party. Then the intermediary 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. Contact us if you would like to learn more about tax-deferred property exchanges and how they might be beneficial.