Tax Free Exchanges
|Like Kind Exchanges Under IRC 1031A. What is “like-kind”?
The like-kind exchange rules provide an exception from the general rule requiring the recognition of gain or loss on the sale or exchange of property. If the transaction qualifies, the property received in the exchange is treated as a continuation of the taxpayer’s investment, and any tax that would have been owed on gain realized from the disposition is deferred.
Section 1031 only applies to property held for productive use in a trade or business or for investment. Consequently, it is not available for transfers of personal residences or “dealer” property.
The word “like-kind” refers to the nature or character of the property, and not to its grade or quality. The fact that one parcel of real property is unimproved and that the other is improved is not material since that fact relates only to the property’s grade or quality, and not to its kind or class.
B. Delayed Exchanges
A delayed exchange occurs when a taxpayer transfers property to another party in exchange for a promise by that party to transfer like-kind property to the taxpayer on some future date. This qualifies for nonrecognition treatment so long as the follow-ing two (2) conditions are met:
C. Reverse Exchanges
When the taxpayers locate property before they are able to locate a buyer for the property they want to give up in a tax-free exchange, it is called a reverse exchange. The IRS established “Safe Harbors” whereby the taxpayor must park the replacement property with an exchange accommodation titleholder in a qualified exchange accommodation agreement and later identify and transfer the replacement property to the taxpayer in exchange for the relinquished property.
D. Advantages and Disadvantages of a Tax Free Exchange