Sitting on a piece of investment property that you would like to sell? By structuring the transaction as a tax-deferred exchange, you can delay paying taxes on the full amount of the gain realized.
Also known as a “like-kind exchange” or a “1031 exchange,” these transactions are only available for investment or business assets. Certain types of assets don’t qualify for a tax-deferred exchange, including inventory, accounts receivable, stocks and bonds, and your personal residence. Keep in mind, too, that the like-kind exchange rules only defer the tax. Any gain will be recognized upon a taxable disposition of the replacement property.
Specific steps must be followed for a deferred exchange to be successful. Start by finding a qualified intermediary, such as an escrow agent or a title company, to facilitate this transaction. You then have 45 days from the date you relinquish your property to the qualified intermediary to name as many as three possible replacement properties. You must take title to the replacement property within 180 days. The rules state that you must replace real property with real property and personal property with personal property. Replacing an apartment building with commercial space, a strip mall, or even undeveloped land all qualify.
While deferred exchanges can save you a significant amount of taxes, following the specific rules can be tricky. For more information about these tax-advantaged transactions, please give us a call.