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If you are considering selling a business or investment property that will generate a large gain and you do not currently need the cash from this transaction, you may have the opportunity to defer the tax by executing a section 1031 like-kind exchange. When completing a like-kind exchange the tax on the resulting gain from the sale of a property may be deferred if a new property of equal or greater value is acquired. There are numerous requirements involved in completing a successful like-kind exchange and include the following:

  • Personal property does not qualify for like-kind exchange treatment, only investment and business property.
  • Like-kind has a broad definition, so property involved in an exchange doesn’t have to be an exact match. For example, raw land can be exchanged for an apartment building.
  • It is common to have delays in an exchange to allow time to line up the transaction. When this occurs, a qualified intermediary is used to hold funds or take possession of a property until the transaction can be closed.
  • When you have a delayed exchange, you have 45 days after the sale to identify a replacement property. Once property is identified you must notify the intermediary in writing of your intent to acquire the property.
  • You must close on the purchase of the new property within 180 days of the sale of the old property.
  • You will be taxed to the extent that you receive cash from the transaction (which is called “boot” in an exchange).
  • Even if you do not receive cash as part of the transaction, you may have “boot” if you have reduced the amount of debt carried on the new property vs. the old property.

In the past year there have been discussions by Congress to consider limiting or eliminating the deferred gain treatment offered by the like-kind exchange rules.  Although this legislation does not currently appear to have much traction, it is important to be aware of potential changes. If you are contemplating the like-kind exchange of a property, it is imperative that you have the proper guidance in the structuring of the transaction in order to comply with the rules. Please contact us if you are considering the sale or exchange of a property so we can assist you with this process.

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