Sponsor spotlight: Postpone taxes with a like-kind real estate exchange

Nancy Ekrem

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.

The like-kind exchange rule

A like-kind exchange involves swapping assets that are similar in nature. Since the passage of the Tax Cuts and Jobs Act in December 2017, like-kind exchanges are now generally limited to exchanges of property. Typically, an equal swap of property 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.

Real estate exchanges

By using a like-kind exchange you can effectively leverage money you would need to pay for capital gains taxes and depreciation recapture tax into the next property. And 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 the intermediary forwards the money to your closing agent to complete the exchange.

Not for the faint of heart

The like-kind exchange rules are very strict. For this reason, it is always best to hire an expert to advise you prior to exploring this tax saving technique. But when done properly, exchanges let you trade up in value without owing tax on a sale. Even better, there’s no limit on the number of times you can exchange a piece of property.

— By Nancy J. Ekrem, CPA
Managing Shareholder
DME CPA Group PC
Certified Public Accountants & Business Consultants
nekrem@dmecpa.com

 

 

One Reply to “Sponsor spotlight: Postpone taxes with a like-kind real estate exchange”

  1. Hi,
    What if 2 or more married(out of state) individuals are on title of a property that was inherited in WA state; one party desires to do a 1031 into another WA state rental property, the others just want their share of the proceeds? Should the ‘others’ should be ‘paid out’ and the property quit claimed to the one desiring to do a 1031? Or could the ‘others’ just be paid out at closing and the 1031 party use their proceeds for a purchase of a like-kind rental? The issue is multiple parties are on title at closing…does this affect the ability for one party to do a 1031?

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