Like-Kind Exchanges:

Once in a great while Congress and the IRS get it right . . . . and leave it that way!!!!!!!

In general, a gain on property sold or exchanged is subject to tax. It may be ordinary; it may be capital gains ....but the profit on the transaction is taxed. However, back in 1924, Congress enacted a law which became Section 1031 of the Internal Revenue Code. This law has remained remarkably unchanged since inception.

Section 1031(a) provides that when "like-kind" property is exchanged at a gain, any tax due on the exchange is deferred until such point as the replacement property is sold or exchanged for non like-kind property.

Of course, there are a few technical requirements.

First and foremost, the exchange property has to be like-kind. This may not be quite as simple as it seems. For example, gold and silver bullion have been deemed to be nonlike-kind. Also, male and female livestock and deemed non like-kind. On the other hand, an apartment building and undeveloped land have been deemed to be like-kind. If you have any questions, let our tax experts assist you in making the determination.
Second, the exchange property must either be used in a trade or business or alternately held for investment. For example, a timber lot might be held for investment but a second residence would probably be deemed as personal rather than being held for investment even if anticipated capital appreciation was a factor when it was acquired.
Third, certain types of property such as inventory and "financial paper" ( stocks, bonds etc.) are specifically excluded.

Many of us have participated in a like-kind exchange when we "traded in" a car. Occasionally we are able to arrange a "swap" of certain pieces of tangible personal property with friends or neighbors.

But.. in the Real World, it's hard to find two people to do the trade.

We can help. Fortunately, the law allows for non simultaneous like-kind exchanges. If the transaction is properly structured, it is possible to "sell" the exchange property for cash proceeds and if replacement property is specifically identified within 45 days and "purchased" within 180 days, the entire transaction qualifies. But, it gets even better. You can first "purchase" the replacement property and then "sell" the exchange property at a future date in a so called Reverse Starker transaction.

These types of transactions take a little planning and structuring. If you the taxpayer actually receive and have dominion and control over the cash proceeds, the deal is off and you pay the tax. However, if you utilize the services of a "qualified intermediary" to hold the cash and in many cases actually purchase the replacement property, the transaction will qualify.

At Dana S. Beane & Company, PLLC, we think Section 1031 is a home run. Working with one of our clients, we were able to structure a transaction which saved thousands of dollars in current tax on a non simultaneous exchange of real property.

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