Like-Kind Exchange – Rental Property

Chris Wittich

A like-kind exchange is just that; an exchange of things that are similar.  They can be very useful in deferring gains on depreciated property.  I wrote a previous post about business vehicles, but there are many kinds of assets that can qualify for a like-kind exchange.  One of the other popular ones is rental properties.  Rental properties are popular because after years of claiming depreciation and hopefully the real estate appreciating, there can be some large gains when comparing the fair market value and the remaining basis.  The like-kind exchange rules state the property must be held for productive use in a trade or business or held for investment, and then exchanged for property that is used in the same manner.  It is very important to understand all the like-kind exchange rules before embarking on one, because one wrong move and you will be sorry.  Once you screw up a like-kind exchange, there is really no fixing it.  Either it qualifies or it doesn’t; there aren’t after-the-fact remedies to fix the situation.

There is a requirement that the property and exchange must take place within 180 days.  That means from the date you give up the exchanged property to the date you take title to the new property can be no more than 180 days.

There is a requirement that a qualified intermediary take title to the exchanged property.  I would recommend using a professional who works with like-kind exchanges.  You can’t just sell your property to Joe Smith and then buy replacement property a few months later from Susie Johnson.  You transfer your property to your favorite like-kind exchange guy, and then you find replacement property within 45 days and complete the transaction in 180 days.  Like-kind exchange guy then transfers you the new property that was obtained from Susie Johnson.  That means you need to know you are doing a like-kind exchange before you start selling your original asset.

One of the other key elements to a like-kind exchange is that if you give up property valued at $100,000 and you get back $80,000 of property and $20,000 of cash, you need to recognize the gain for the cash received.  Lots of rules apply when you are exchanging properties between related parties.  Obviously the IRS can’t have everyone swapping properties around with their parents while everyone avoids paying taxes.


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