I’ll Trade You? – Avoiding Taxes Through Like Kind Exchanges
March 16, 2007
Conducting a “like-kind” exchange under Internal Revenue Code section 1031 is one of the few legitimate tax shelters available to individuals, corporations and other business entities engaging in the disposition of assets. And at this time of year, all of us want to avoid taxes of one kind or another.
Deferred Exchanges allow taxpayers to engage in transactions for the exchange of like kind property and avoid capital gains tax on the appreciation in the value of their property. A 1031 exchange (or a tax-deferred exchange) permits investment property owners to sell a property and defer tax payments by reinvesting the proceeds of the sale into a “like-kind” property.
Simply put, it is a method whereby a property owner trades one or more relinquished properties for one or more replacement properties of “like-kind,” while deferring the payment of federal income taxes and some state taxes on the transaction.
Unlike a typical sale transaction where the property owner is taxed on any gain realized from the sale, the tax on the gain in a 1031 Exchange is deferred until some future date. The theory is that when a property owner has reinvested the sale proceeds into another property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer’s investment remains the same, only the form has changed, i.e., a parking lot for an apartment building; therefore, it would be unfair to force the taxpayer to pay tax on a “paper” gain.
Clearly, the ability to realize appreciation on property, reinvest the appreciation and defer capital gain and depreciation in order to recapture taxes to a later date is advantageous to a property owner. The procedure, if followed carefully, can be a financial boon…
You may read more at the link below.
by: Julie A. Dialessi-Lafley, Esq.