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.
In order to qualify for a like-kind exchange, the following requirements must be met.
- The property sold and property purchased must be used in a trade or business or as an investment.
- The transaction must be handled through an “intermediary” (i.e., bank, agent, etc.) where no money is received by you. This will have to be in place before selling the initial parcel and usually costs a percentage of the sale proceeds.
- 100% of proceeds from the sale must be used to purchase like-kind property. If you use less than 100% of the proceeds, then a portion of the gain may be recognized (meaning you can’t receive any cash or other monetary value).
- The debt before the transaction will need to be the same or less than after the purchase of the like-kind property. If the debt after purchasing the like-kind property is less, than a portion of the gain may be recognized.
- The time between selling the initial parcel and identifying the like-kind property can’t be more than 45 days. This will need to be documented in writing.
- The time between selling the initial parcel and the purchase date of like-kind property can’t be more than 180 days. This will be documented by closing documents.
If you plan on selling one or more of your existing parcels, purchasing new parcel(s) and still qualifying for a like-kind exchange, you can—if the following qualifications are met.
- You comply with all of the requirements listed above.
- Assuming you don’t sell the existing parcels on the same date, the clock starts “ticking” for the 45 day and 180 day rules on the sale date of the first existing parcel. So, if you don’t sell the second existing property in time to close on the new parcel (within 180 days from the sale of the first existing parcel) then the entire transaction would not qualify as a like-kind exchange. This transaction is a little more complicated and comes with some additional risk. To reduce the risk, you can identify the purchaser of the existing parcels and the seller of the new parcel(s) before starting the transaction.
It’s also important to note that you can do the reverse by selling one parcel and using the proceeds to purchase two or more parcels, assuming you comply with all of the above.
For more information on like-kind exchanges, contact a ShindelRock tax professional today.