Like-Kind Exchanges

Like-kind exchanges are a popular method of deferring taxes on the disposition of business or investment property, especially real estate. Fortunately for taxpayers, recent proposals to restrict like-kind exchanges were not included in the recent tax bill. The following are some rules of thumb for like-kind exchanges:

  • Virtually any business or investment real estate will be like-kind with any other business or investment real estate.
  • Taxpayers may recognize gain, even in a valid §1031 exchange, to the extent of "boot" received. Generally, a taxpayer will have received boot if:
    1. the taxpayer receives property of less value than the sales price of the relinquished property, less selling expenses; or
    2. the taxpayer acquires less equity in the replacement property than he had in the relinquished property.
  • Deferred exchanges using a qualified intermediary are commonly performed. The tax code and regulations set forth a detailed set of "safe harbors" under which deferred exchanges will qualify under §1031. Some important aspects of deferred exchanges are:
    1. Replacement property must be identified in writing within 45 days of the closing on the relinquished property.
    2. The taxpayer must receive the replacement property by the earlier of the 180th day after the closing on the relinquished property or the due date (including extensions) of the taxpayer's return for the year in which the relinquished property is transferred.
    3. Many title companies will act as qualified intermediaries. A formal exchange agreement should be entered into which will document the intent of the parties and exonerate the intermediary from any liability.
    4. The taxpayer can search and enter into contracts for replacement property. The contracts will be assigned to the qualified intermediary.
    5. Property can be "direct deeded" so that the intermediary does not enter into the chain of title.