Articles

Article V "Tax-Deferred Like Kind Exchange"

A tax-deferred like kind exchange allows you to dispose of investment properties and acquire "like-kind" properties while deferring federal capital gains taxes. Within carefully defined limits, Section 1031 of the Internal Revenue Service Code permits you to carry forward the gains you have made on one property into another one, deferring capital gains taxes and, thus, allowing the full use of your equity in the acquisition.

Any real or personal property can be exchanged, provided it is held for productive use in a trade or business for investment and is exchanged for property of like-kind that will also be held for one of these same purposes. Like-kind does not mean exactly the same with the exchange of real property. An apartment house may be exchanged for other real property like a warehouse, retail center, office building, or even a leasehold interest in real estate of 30 years or more. Most real property is considered like-kind to other real property. Like-kind limitations on personal property are more restrictive. Essentially, items of personal property must be classified similarly under certain government accounting classifications.

For your exchange to be fully tax-deferred, your replacement property must be equal to or greater in value and equity than your relinquished property. The debt on your replacement property must also be equal to or greater than the debt on your relinquished property, unless cash is added to offset debt. To the extent that cash out from the property sold exceeds cash put into the property to be acquired, the cash is considered to be "boot" which is recognized for capital gains purposes.

The time periods for Identifying and Acquiring the Replacement properties must be strictly adhered to. The replacement property must be identified within 45 days of the transfer of the first relinquished property. Recognizing that 45 days may not be sufficient time for the taxpayer to perform due diligence or satisfy contingency items, the internal revenue code tax regulations permit the taxpayer to identify multiple properties. Acquisition of the replacement property must be completed by the earlier of (i) 180 days of the transfer of your first relinquished property or (ii) the due date of filing your federal income tax return for the year in which you transferred the first relinquished property, including extensions.

Qualified third party intermediary to hold the funds from the sale of the property being sold. The third party intermediary is generally a title company but may be any qualified company. When the conditions of closing have been met, your relinquished property will be conveyed to the buyer. While the conveyance will be directly from you to the buyer, it will represent a transfer from you to the Intermediary in exchange for other property that you will receive at a later date. It also represents the sale from Intermediary to the buyer for cash. The cash proceeds from the sale of the relinquished property must be delivered directly to the Intermediary. When the conditions of closing for the replacement property have been met, the Intermediary will deliver the exchange proceeds to the settlement agent to acquire the replacement property. The seller will convey the replacement property directly to you.

If you have any questions regarding a like-kind exchange, please call either Bruce Belsky or Barry Ross at our office.

The purpose of this website is to familiarize its readers with the subject matter. The author is not rendering legal, accounting or other professional advice or opinions on specific facts and assumes no liability with the use of this information. The law is very complex and constantly changing. No one should attempt to apply or interpret any law without the help of a trained expert. The author is licensed to practice law only in New York State and any law referred to on this site is the law as it applies in the State of New York.