Like Kind Exchanges Can Save You Taxes

Tax law has a history of recognizing the need for tax deferral when an investment has not been fully liquidated. One real estate tax planning technique that defers federal taxes is the like kind exchange. Generally, no gain or loss is recognized when business(ie: office building) or investment property(ie: rental building) is exchanged for like-kind property.

Most people think that these exchanges only work when one individual swaps property with another individual. However, a typical exchange involves three parties. The seller locates a buyer for his piece of property, and locates a piece of property he wishes to acquire(target property). The buyer then buys the target property from the third party and exchanges it for the seller's property. The purchase and exchange by the buyer occur simultaneously.

Other exchanges do not have to occur simultaneously. The seller would sell the original property and have the proceeds deposited with an escrow agent. The seller must identity replacement property within 45 days. Generally, the seller must close on the replacement property within 180 days of the original sale. The escrow agent would purchase the replacement property and transfer ownership to the seller. Escrow agent fees for this transaction vary depending on the size of the exchange. Generally, the fees are reasonable.

If you are contemplating selling real estate and not liquidating your investment, chances are the tax law will provide for the deferral of taxes. However, careful planning must be done to comply with these tax laws. Whether you are selling a primary residence, vacation home, rental property, store or motel, a like kind exchange can assist you in minimizing your taxes.