Sponsor spotlight: Postpone taxes with a like-kind real estate exchange

Nancy Ekrem

The tax law offers entrepreneurs and real estate investors who want to sell real estate and buy similar real estate at the same time a valuable opportunity to save taxes. This tax break is known as a peer-to-peer or tax deferred exchange. By following certain rules, you can defer all or part of the taxes that would otherwise be due if you were to sell a property for a profit.

The similar exchange rule

A like exchange includes the exchange of assets that are similar in nature. Since the passing of the Tax Cut and Employment Act in December 2017, exchanges of like people are now generally limited to exchanges of property. Typically, an equal exchange of property is rare. A certain amount of cash or debt must change hands between two parties to complete an exchange. Cash or other dissimilar assets received in an exchange may be taxable.

Real estate exchanges

By using a like-for-like exchange, you can effectively put the money you would need to pay capital gains taxes and depreciation tax on the next property. And in a real estate exchange, it’s unusual to find two parties whose properties match. This is not a problem as the rules allow exchanges with three parties. Three-party exchanges require the use of an intermediary. The broker coordinates the paperwork and holds your sales proceeds until you find a replacement property. Then the broker forwards the money to your closing agent to complete the exchange.

Not for the faint of heart

The rules for similar exchanges are very strict. For this reason, it is always best to hire an expert to advise you before exploring this tax saving method. But when done right, exchanges can add value to you without paying taxes on a sale. And even better: you can exchange a property as often as you like.

– By Nancy J. Ekrem, CPA
Executive Partner
DME CPA group PC
Certified auditors & management consultants
[email protected]

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