Question

Investors often use the like-kind exchange provisions in the tax code to defer recognition of gains when they want to dispose of an asset. These are complicated transactions which has lead to a small industry being created just to meet the requirements of the provisions. Unfortunately, there are two requirements of like-kind exchanges which are often messed up. If messed up, these result in nullifying all or part of the exchange benefit.

(a)   What are the requirements for like-kind exchange treatment for real property? For personal property?  

(b)   Of those requirements, which do you believe would be the two which are most often messed up, thereby nullifying all or part of the gain deferral?

Answer 1

a)ANSWER:- A like kind exchange ,sometimes styled as a like kind exchange,it is a tax deferred transaction that allows for the disposal of an asset and the acquisition of another similar asset without generating a capital gains tax liability from a sale of the first asset.

A like kind exchange is used when someone wants to sell an asset and acquire a similar one while avoidind the capital gains tax.Like kind exchange are heavily monitored by the IRS and require accurate bookkeeping to ensure no tax penalty is incurred.

The requirements for like kind exchange treatment for real propery are as follows:-

A 1031 exchange is only applicable for investment or business property,not for personal property.In other words,you can't swap one primary residence for another.

FOR EXAMPLE:-

1)If you moved from California to Georgia,we could not exchange our primary residence in California for another primary residence in Georgia.

2)If we were to married and move into the home of our partner,we could not exchange our primary residence to a vacation property.

3)If you were to own a single family rental property in Idaho,we could exchage it for a commercial rental property in Texas.

FOR PERSONAL PROPERTY:-To qualify as a 1031 exchage,the property being sold and the property being acquired must be" like kind"

FOR EXAMPLE:-

1)Exchanging an apartment building for a duplex would be allowed.

2)Exchanging a single family rental property for a commercial office building would be allowed.

3)Exchanging a rental property or vacation rental for a restraurant space would be allowed.

b) ANSWER:-. The process for the 1031 exchange if simply it is followed,otherwises some issuses can be arised.We need to adhere at least two specific deadlines.In general deadlines are sometimes misused and if we miss a deadline the exchange ould then not qualify to defer capital gains.

Requirements that property be identified and that exchange be completed not more than 180 days after transfer of exchanged property.For purpose of this,if any property received by the taxpayer shall be treated as property which is not like kind property if which are as follows:-

1)Such property is identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property.

2)Such property is received after the earlier of the day which is 180 days after the date on which the taxpayer transfers the property.

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