What Is a Like-Kind Property Exchange?

A like-kind property exchange is a tool that many real estate investors use in order to get out of paying capital gains taxes. The like-kind property exchange is also sometimes referred to as a 1031 exchange. This process can help investors acquire different properties and delay paying capital gains taxes on their original properties. Here are a few things to consider about the like-kind property exchange.

Property Exchange

With this type of exchange, you have to make sure that the property that you are exchanging is of like kind. In most cases, people trade real estate, but you could also exchange some type of personal property. If you are trading a piece of property in the United States, you could not trade for a property that is outside of the United States. You could even trade livestock with another individual as long as the livestock is of the same sex.

No Monetary Gain

With this type of property exchange, you do not necessarily have to trade one property for another with the same individual. You could sell your property and then use that money to purchase another property of like kind. As long as you do this, you can avoid paying capital gains taxes. In order to qualify for this program, the property has to serve some type of business or investment purpose. It cannot be a property that you are purchasing for your personal residence or pleasure.

Time Limits

In order to make this process work, you have to stick with the time limits that are set forth by the IRS. The first period that you must abide by is called the identification period. This is a period during which you can identify potential properties that you want to purchase with the proceeds from the sale of your other property. The window for this process is 45 days from the date of the sale of your relinquished property.

The other time limit that you have to abide by is referred to as the exchange period. The exchange period deals with the amount of time that you have to actually purchase another property with the proceeds from the sale. This time limit is 180 days after the original sale takes place.

If you do not locate potential properties within 45 days or buy one of those properties within 180 days, you will forfeit the ability to get out of the capital gains taxes from the sale.

Qualified Intermediary

One of the most important factors in this process is a qualified intermediary. When you sell a piece of property, you have to send the funds to a qualified intermediary immediately. This is a third party that will hold the funds on your behalf until you purchase another property. This means that you have to plan on doing a like-kind property exchange from the beginning. You cannot decide later that you want to do this process and still get the tax benefits. If you take possession of the money from the sale, you will forfeit your right to complete the exchange.

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