For decades, the Internal Revenue Code allowed for “section 1031” exchanges, more commonly known as like-kind exchanges, which allowed business owners of a plethora of “qualified property” such as real estate, vehicles, and livestock to make arrangements to swap equivalent property without incurring an income tax liability. Inevitable discrepancies and questionable exchanges cropped up over the years. This led to revisions following the enactment of the Tax Cuts & Jobs Act of 2017. Like-kind exchanges became limited solely to business or real estate investment property. However, utilized correctly, it still can be advantageous for business property owners.
Like-Kind Property?
Currently, only business or real estate investment property qualify for like-kind exchanges. Personal property like your home cannot be used in like-kind exchanges. The property must generally be of the same nature or character, even if they may differ in quality or grade. For example:
Wendy owns an apartment complex in Buena Park, CA built in 2015 worth $3.5 million. Her business friend, Irene, owns an apartment complex worth also approximately $3.5 million. It is in well-kept condition, built in 2008, and is located in Indio, CA. The two own qualified property in these circumstances and can make arrangements for a like-kind exchange.
Like-kind exchanges may also allow the seller to defer depreciation recapture, which tends to increase the taxability of that property if it were in a regular sale. Utilizing like-kind exchanges may also come with advantages in relation to state taxes, depending on the applicable laws and regulations that the like-kind exchange takes place in. Form 8824 is used to report any like kind exchanges.
Like-kind exchanges can help property owners save time from going through the extra steps of making a sale and acquiring new property. However, figuring a roadmap to a successful like-kind exchange may require some guidance from a team knowledgeable of any anticipated tax concerns, such as us here at MiklosCPA, a California-based firm. MiklosCPA supports clients of emerging and specialized firms with their tax and accounting needs. Drop us a line to learn know more of our services. Or, let’s stay in touch & follow our social media pages.