Deferring Federal Tax Liability with “Like Kind” Exchanges

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Whenever you sell a business or investment property and you have a taxable gain, you generally have to pay tax on the gain at the time of sale.  IRC Section 1031 provides an exception and 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.  Gains deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

The exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.

If you complete a 1031 like kind tax deferred exchange, you must follow the law and the IRS regulations very meticulously.   Timing, having a plan of action, and taking appropriate action is everything.  It helps to have a real estate broker with up to date knowledge of the like kind real estate markets.   One of the risks in the transaction is with 1031 exchange companies that hold money.

My recommendations:

• I would ask for references and a track record when transferring large amounts of money with an intermediary company
• Beware of schemes. Taxpayers should be wary of individuals promoting improper use of like-kind exchanges.  Typically they are not tax professionals.   Sales pitches may encourage taxpayers to exchange non-qualifying vacation or second homes.
• Many promoters of like-kind exchanges refer to them as “tax-free” exchanges not “tax-deferred” exchanges.
• Taxpayers may also be advised to claim an exchange despite the fact that they have taken possession of cash proceeds from the sale.
• Read the IRS information fact sheet on 1031 exchanges
• Review IRS form 8824
• Retain a qualified certified public accountant that can help you plan and implement all aspects of the transaction.

Copyright 2017 Nate Bernstein, Attorney at Law. LA Real Estate Law Group. All Rights Reserved.

The author of this article, Nate Bernstein, Esq., is the Managing Counsel of LA Real Estate Law Group, and a member of the State Bar of California and his practice concentrates in the areas of complex real estate litigation, commercial litigation, employment law, and bankruptcy matters. The contact number is (818) 383-5759, and email is [email protected].  Nate Bernstein is a 22 year veteran Los Angeles real estate and business attorney and trial lawyer. Mr. Bernstein also has expertise on bankruptcy law, the federal bankruptcy court system, creditor’s rights and debtor’s bankruptcy options. He previously served as Vice President and In House trial counsel at Fidelity Title Insurance Company, a Fortune 500 company, and in house counsel at Denley Investment Management Company. Nate Bernstein created www.laquiettitleattorney.com, a leading educational resource on quiet title real estate litigation. Nate Bernstein is a local expert on real estate law and economic trends in the real estate and leasing market, business law, and bankruptcy law. Nate has personally litigated more than 40 major real estate trials, and has settled more than 200 complex real estate and business cases. 

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