Do you qualify for a like-kind exchange?
Are you thinking about selling parcels of land and then turning around and purchasing additional parcels? If you’ll realize gains on the sale of your existing parcels, you should consider a “like-kind exchange”.
Under Code Section 1031, the IRS provides an exception that allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange is tax-deferred, but it is not tax-free.
To qualify for a like-kind exchange, several requirements must be met:
1. The property sold and the property purchased must be used in a trade or business or for investment purposes.
2. The transaction must involve an intermediary, such as a bank or agent, ensuring that no money or monetary value is received directly by you.
3. 100% of the proceeds from the sale must be reinvested in like-kind property; any amount less may result in recognizing a portion of the gain.
4. The debt after purchasing the like-kind property must be equal to or greater than the debt before the transaction; reducing the debt may trigger recognition of gain.
5. The identification of the like-kind property must occur within 45 days of selling the initial parcel, documented in writing.
6. The purchase of the like-kind property must be completed within 180 days of selling the initial parcel, as evidenced by closing documents.
If planning to sell existing parcels, purchase new ones, and still qualify for a like-kind exchange, additional criteria must be met:
1. Adherence to all aforementioned requirements.
2. Starting the 45-day and 180-day periods from the sale date of the first existing parcel, even if subsequent parcels are sold on different dates.
3. Failure to close on the new parcel within 180 days from the sale of the first existing parcel will disqualify the entire transaction from like-kind exchange treatment.
4. To mitigate risk, identify the buyer of the existing parcels and the seller of the new parcels before initiating the transaction.
It’s also possible to conduct a reverse exchange, selling one parcel and using the proceeds to purchase multiple parcels, provided all requirements are satisfied.
For more information on like-kind exchanges, contact a ShindelRock tax professional today.