Postpone Taxes with a Like-Kind Exchange

December 28, 2021

The real estate boom creates opportunity

The tax law provides a valuable tax-saving opportunity to business owners and real estate investors who want to sell property and acquire similar property at about the same time. This tax break is known as a like-kind or tax-deferred exchange. By following certain rules, you can postpone some or all of the tax that would otherwise be due when you sell property at a gain.

The like-kind exchange rule

A like-kind exchange involves swapping assets that are similar in nature. Since  the passage of the Tax Cuts and Jobs Act in December 2017, like-kind exchanges are now generally limited to exchanges of property. Typically, an equal swap of property is rare. Some amount of cash or debt must change hands  between two parties to complete an exchange. Cash or other dissimilar  property received in an exchange may be taxable.

Real estate exchanges

By using a like-kind exchange you can effectively leverage money you would need to pay for capital gains taxes and depreciation recapture tax into the next  property. And with a real estate exchange, it is unusual to find two parties whose properties are suitable to each other. This isn’t a problem because the rules allow for three-party exchanges. Three-party exchanges require the use of an intermediary. The intermediary coordinates the paperwork and holds your sale proceeds until you find a replacement property. Then he forwards the money to your closing agent to complete the exchange.

Not for the faint of heart

The like-kind exchange rules are very strict. For this reason, it is always best  to hire an expert to advise you prior to exploring this tax saving technique. But when done properly, exchanges let you trade up in value without owing tax  on a sale. Even better, there’s no limit on the number of times you can exchange a piece of property.

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