Like-kind Properties

Written by Linda Alexander
Bookmark and Share

Like kind property exchanges are so popular because they allow business owners and investors to trade properties without claiming a profit, therefore, deferring paying capital gains taxes. If there is no profit, you can't be expected to pay taxes. Similarly, if there is no cash involved, you can't actually claim a profit or have to pay taxes ... that is why the IRS requires you to go through a qualified intermediary when performing a like kind exchange of real estate.

Many people invest in real estate that greatly appreciates in value over the years. However, when they go to sell it, the taxes they owe are worth more than the profit they would make. The tax bill is so high that they feel trapped and don't want to sell. That's why this tax deferral strategy is so popular. Instead of paying on the gain, you can trade one property for another, and not have to pay taxes until you cash out.

High-growth areas are especially susceptible to this type of problem. Investors often buy cheap farmland and hold it for a long time, then sell it when developers come in. They have taken all the depreciation deductions over the years and already reaped the benefits, but they are still put off by the prospect of paying a high tax bill. In a word, they cannot afford to get rid of the property they wish to sell.

Locating Replacement Properties

Like kind exchanges are wonderful when you want to grow your investments and keep tax laws from getting in the way. As long as you follow the rules set by the IRS, you will have no problem performing a 1031 exchange. You can even find help locating properties to swap.

Bookmark and Share