In the event that an investor should be involved with a sale or exchange of real estate, it is critical to understand the benefits and scope of “Like-Kind Exchanges.” Generally, the sale and exchange of property is a taxable event. However, under Section 1031 of the Internal Revenue Code, an investor may qualify for the taxable gain from the exchange to be deferred indefinitely.
Prior to the passage of the “Tax Cuts and Jobs Act of 2017” (otherwise known as the GOP Tax Plan or the Tax Reform Bill), both personal property and real property exchanges were granted the tax-deferred treatment. The new law now limits the deferral treatment for exchanges involving only real estate transactions.
The scope of permissible tax-deferred exchanges is very broad, including the exchange of an apartment building for a vacant lot. However, like-kind exchanges generally do not apply to primary residences and vacation homes. They only apply to exchanges of real property held for the purpose of investment or for productivity use or used in a trade or business. In addition, the property received in the exchange must also be held for the same or similar purpose. Our firm can help an investor decide whether a like-kind exchange is suitable to his or her circumstances.