Amid a plethora of new and proposed tax legislation, it’s important to remember tax-savings strategies that existed before the COVID-era. One of these strategies, which is particularly beneficial for taxpayers engaging in real estate transactions, is utilizing the like-kind exchange rules. Take a look below to see how like-kind exchange rules might benefit you.
Like-kind exchange rules allow a taxpayer to defer his or her taxable gain when he or she exchanges “like-kind” assets. For example, assume the following facts:
If the like-kind exchange rules are met, the $40,000 capital gain can be recognized in Year 5 instead of Year 1. It’s important to note that, in general, to achieve full gain deferral the new property purchased must be of equal or higher FMV compared to the property sold.
There are a lot of rules to abide by if you want to utilize like-kind exchange rules. It’s important to be proactive and talk with your tax accountant before you exchange real estate properties. If you exchange properties and wait to let your tax accountant know in April of the following year that you’d like to utilize like-kind exchange rules, then there’s a good chance that you won’t qualify for gain deferral.