Tax Free Exchanges

UPDATE: Watch out!  The Tax Court recently ruled that using a related party as an intermediary disqualifies these transactions.  Many taxpayers do not realize that you can replace your business premises or investment property without having to pay taxes on the gain. It is called a “like kind exchange,” but  you need not actually exchange your property. You pay no current tax.  The gain is postponed by assigning the relinquished property’s basis to the new, replacement property.

You must follow the rules carefully, and I can’t cover them all here. However, just to summarize, to qualify for a like kind exchange, the relinquished property and the replacement property must both be held for business or investment purposes. Neither may be held primarily for sale or for personal use. Personal property and cash do not qualify. A sale of property followed later by reinvesting the proceeds in a like property does not qualify as a like kind exchange and is taxable. However, See THE NONEXCHANGE, below, for the rules covering exchanges that are not simultaneous.

If you receive property that does not qualify, or cash (called boot) property, the exchange may qualify, but there is taxable gain in an amount up to the boot’s value. Furthermore, if the relinquished property is mortgaged, you are treated as if you received cash (boot) equal to the debt.

THE NONEXCHANGE – A LIKE KIND EXCHANGE OF ANOTHER COLOR One transaction that qualifies for this treatment I call the “Nonexchange,” (or third party exchange). You use an “intermediary” to sell the relinquished real property at one point and buy for you a replacement party at another time. You must follow the rules on third party exchanges very carefully.

If you have questions about doing one of these transactions, please make an appointment. What I discuss above is the tip of the iceberg, but is a really valuable way to replace property without current taxation.

About Wis Laughlin

I help clients with tax preparation and IRS representation, estate planning, and complex contracts, including LLC's. As a former IRS tax attorney in their National Office. Law.com picked Wis in 2017 and several prior years as one of the Top Tax and Estate Lawyers in Tennessee. I am your advocate, not your accountant. I don't tell you what you can't do. I show you how to do it.
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