5 Keys to Deferring Income Taxes with Like-Kind Exchanges
“5 Keys to Deferring Income Taxes with Like-Kind Exchanges“ by Jeff Brooks, CPA, CGMA | Principal – Tax
Overview of 1031 Like-Kind Exchanges
As a business owner, if you are planning to sell appreciated rental, investment or business property, you may want to consider structuring the sale as a 1031 like-kind exchange. This allows you to defer the payment of income taxes by acquiring like-kind replacement property. Generally, if you sell a business or investment asset at a gain this will result in a taxable sale. Utilizing a like-kind exchange, you’ll either have no (or limited) income tax due at the time of the exchange.
1031 like-kind exchanges allow you to exchange property multiple times and defer payment of tax until the time you actually sell the property for cash. So, the tax can be deferred until you finally cash out. This can be a great tax benefit for growing businesses, as older equipment can be traded in for newer equipment without generating additional tax.
Key Things to Consider
- Exchanges that will not qualify for 1031 include inventory, stocks/bonds, partnership interests, and certain personal use property
2. Exchange does not have to be a simultaneous swap of properties
- Delayed or three-party exchanges allow the use of qualified intermediaries to hold cash and buy replacement properties on your behalf
- You must meet specific time limits or the gain will be taxable
3. Reverse exchanges
- Reverse exchanges allow the acquisition of the replacement property first and then held in trust by a qualified intermediary while you dispose of the relinquished property
4. Watch exchanges involving cash and mortgage debt
- Exchanges where cash is received and/or debt is assumed or relinquished will likely trigger the recognition of (at least some) taxable gain
5. Special rules apply when depreciable property is exchanged
- Depreciation recapture (taxed as ordinary income) can be avoided through a like-kind exchange
The rules for structuring these transactions can be complex, so if you are considering a 1031 like-kind exchange or would like more information, contact me at firstname.lastname@example.org or 330.867.7350, or your trusted advisor at Apple Growth Partners to get started.