From
The KDDK Advantage - June/July 2006
Like-Kind Exchanges
By Allison Comstock
If you own commercial real estate or
investment property and are thinking of selling, you may
be able to defer any capital gains tax under Internal
Revenue Code section 1031, which deals with like-kind
exchanges. Under section 1031, if sellers use the proceeds
from the sale of commercial or investment property to
purchase another piece of investment property, they can
defer capital gains tax - sometimes permanently.
The IRS is fairly liberal regarding
what constitutes “like kind” real estate. For example,
a farm can be sold and replaced with other investment
real estate such as a duplex, industrial building or strip
shopping center. The value of the replacement property
must be of equal or greater value in equity than the real
estate that was sold.
The rewards of like-kind exchanges can
be great, but to qualify for tax deferral under section
1031, three basic rules must be observed meticulously:
- Property must be like-kind. This
isn’t difficult to achieve with real estate, but exchanges
can apply to tangible personal property, as well, and
the definitions of like-kind personal property under
section 1031 are trickier.
- Property bought and sold must be
used in trade or business or for investment purposes.
Property held for sale, such as an inventory of lots
in a subdivision, doesn’t qualify.
- There are strict time limits. The
taxpayer must properly identify replacement property
within 45 days of the sale of the real estate, and must
close on the purchase of the replacement property within
180 days.
In like-kind exchanges, purchases and
sales don’t have to take place simultaneously, but a non-simultaneous
sale requires that the funds be held by a qualified intermediary
and that certain tax regulations are met. With careful
advance planning, though, the rules of like-kind exchanges
permit a great deal of flexibility. If you have questions
or want to know more about like-kind exchanges, contact
Allison Comstock at 812-423-3183 or acomstock@kddk.com.
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