Question

Generally, when would it be more beneficial for a taxpayer to not defer gain with a like-kind exchange?

Answer 1

Hello

Whenever we sell investment property or a business and have a profit on it, we have to pay taxes on it at the time of sales but IRC Section 1031 provides an option to defer this tax by reinvesting the sale proceeds into a LIKE-KIND Property and it is called a like-kind exchange.

We can use this at our avantage to defer taxes, but not to prevent taxes. But there can be cases that deferment is not a good option.

There are cases when the tax rate on gain on sale of investment property is substantially lower than the tax rate on ordinary/normal income and in that case the taxpayer could benefit himself/herself by claiming depreciation deductions on newly acquired investment property and hence will be better off in foregoing the deferral option. Doing so, he/she will have a higher depreciable basis and therefore a higher net tax savings over time as we claim depreciation deductions as compared to deferring the tax payments.

I hope this solves your query.

Do give a thumbs up if you find this helpful.