Are you considering a like-kind or 1031 exchange? With a like-kind exchange, you sell something you own now and replace it with similar property. If you structure the transactions correctly, you can defer any capital gains as long as you keep exchanging properties. Here are some things to keep in mind to get the best tax value out of it.
- The properties in an exchange must be of “like kind” and must be either used in a trade or business or be investment property. Land for land works, but exchanging land for a truck won’t.
- Trade up in value or stay at the same level. This ensures that the gain is deferred.
- Reinvest all the proceeds and keep debt at either the same level or higher. Extra cash to you or less debt will result in a taxable gain.
- Use a reputable qualified intermediary to complete the transaction. Don’t attempt to save money and do it yourself, or ask your attorney or accountant to do it. The IRS may challenge it and you could pay tax on the gain now. Also be sure to choose an intermediary with a solid reputation. If they can’t fulfill their part of the deal, you may have a taxable gain now.
- Pay attention to the deadlines for completing the exchange. You have 45 days to identify replacement property and 180 days to complete the transaction. Missing either of these will result in taxable gain now.
- Discuss any plans for an exchange with your accountant BEFORE you do this. We can run the numbers and help you decide if this is a good deal or not. Remember, the gain is tax-deferred, not tax-free. If you work closely with us throughout the process, we can help you maximize the value and defer the most gain.
Call our office today if you’re considering an exchange, or if you’re in the process of completing one. We can help you make sure you defer the maximum gain, and can help you with the long-term planning to reduce your tax bill.