Like-kind Exchanges (1031)
A like-kind exchange (1031) is a United States tax deferred exchange that allows for the disposal of an asset and the acquisition of another similar asset without generating a tax liability from the sale of the first asset. A like-kind exchange can involve the exchange of one business for another business, or one real estate investment property for another real estate investment property.
If you are holding on to appreciated real property because you don't want to pay capital gains taxes, a like-kind exchange may be the answer. The IRS allows you to defer gains on property if you exchange it for property of the same nature or character.
Most exchanges of real property can be considered like-kind exchanges, as long as neither property qualifies as your residence. For example, you could exchange farmland for an apartment building of equal or greater value without recognizing any gain at that time. Your basis in the new property is reduced by the amount of deferred gain.
Do not attempt a creative like-kind exchange arrangement without consulting a professional. There are special rules about who can qualify as a facilitator in this situation, and timing is critical.
Like-kind exchanges allow you to defer gain on an exchange, but you must also defer any loss on the exchange. Therefore, it may be wiser to sell properties where the fair market value is less than its undepreciated basis.
The like-kind exchange is a powerful tool for minimizing taxes, but planning and executing such an exchange is a complicated and delicate process. If you own property and are considering a like-kind exchange, consult Mandamus LLC before moving forward.
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