Like-Kind Exchanges: Tax Deferral Strategies on a Sale of Property

Many taxpayers looking to grow their business, changing their real estate investment strategy, or receiving an offer they just can’t refuse to sell property should consider the tax-deferral strategy of utilizing a like-kind exchange. Structuring a like-kind exchange can be a simple exercise or can cause massive confusion, depending on the property ownership and the goals of the taxpayer.

The first step in initiating an exchange is to consult with a tax advisor prior to the sale of the property. In my experience, it is often the taxpayer who does not consult with an advisor that ends up dealing with an exchange not being properly executed and unnecessary tax being paid.

Like Kind Exchange General Rules

Some general rules regarding a sales transaction qualifying for a like-kind exchange:

  • The property involved in the exchange must be of “like-kind.” The words “like-kind” refer to the nature or character of the property and not to its grade or quality.    
  • The same taxpayer who disposed of the relinquished property must acquire the replacement property.
  • The property exchanged must be property held for productive use in a trade or business or for investment. Property held for investment does not includes stocks, bonds, notes held or interests in partnerships.
  • The taxpayer cannot have constructive receipt of the funds from the sale of the property. There must be substantial restrictions and limitations upon the taxpayer’s access to or control of the proceeds from the disposition of the relinquished property.
  • Identification of the replacement property must occur within 45 days from the transfer of the relinquished property, and the acquisition of the replacement property must occur within 180 days.

The tax deferral benefits of a like-kind exchange can be significant. Taxpayers should evaluate their personal tax situation and consult with their advisor before entering into any like-kind exchange strategy. 

© 2014 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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