Like-Kind Exchanges – Robert Bell, CPA
We are constantly dissecting the comprehensive and complex Tax Cuts and Jobs Act of 2017 (TCJA). One particular change to the tax code involves changes to section 1031 – commonly referred to as Like-Kind Exchanges. The new code reads:
“No gain or loss shall be recognized on the exchange of real property held for productive use in a trade or business or for investment if such real property is exchanged solely for real property of like kind which is to be held either for productive use in a trade or business or for investment.”
Prior to this change, gains on the sale property (personal and intangible) were eligible for deferred tax treatment. TCJA has limited this now and narrowed the scope of the code to only include real property. One important takeaway from this is that the property sold must be “exchanged solely for real property.” This quite literally means that only real property can be received in order to defer all of the gain on a Like-Kind Exchange. If cash is received, relief of debt or other property (not real property) is received, the taxpayer will be required to recognize some gain on the transaction. One more note, domestic property must be exchanged for domestic property, and foreign property must be exchanged for foreign property.
The most commonly used 1031 exchange is known as a Delayed Exchange, where the taxpayer has 45 days after transfer of the real property to identify replacement property and must conclude the exchange within 180 days. An important note on a delayed exchange: the taxpayer can never hold the cash generated from the sale of their property. The proceeds must be held by a Qualified Intermediary. The job of the Qualified Intermediary is to hold the funds from the sale and transfer those funds to the seller of the replacement property.
There can be significant tax advantages to utilizing a Like-Kind Exchange, but these transactions can require strict adherence to the tax code. If you are considering a 1031 exchange, we recommend you consult with your tax advisor.