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Overview

Real estate entities looking to expand their footprint and market offerings are often on the lookout for new commercial, industrial or residential real estate investment opportunities. Brown Smith Wallace has extensive experience advising real estate clients on a variety of complex tax issues, including the proper execution of like-kind exchanges as a tax-deferral strategy.

Commonly referred to as a 1031 exchange, a like-kind exchange is a tax-deferral method that allows a real estate owner to exchange one business or investment property for another without recognizing a gain or loss. In other words, the exchange allows the real estate owner to exchange properties while deferring taxes due into the future. To achieve the desired result, taxpayers must follow strict rules as defined in Internal Revenue Code Section 1031.

To qualify for this tax deferral opportunity, the following requirements must be met:

  • Both the property sold and acquired must be of like-kind and must be held for business or investment purposes.
  • The value of the assets exchanged and received must be equal. Typically, cash must be included in a deal to make the property values equal, which causes a portion of the transaction to be taxable.
  • The replacement property being purchased must be identified within 45 days of when the original property was transferred.
  • The replacement property must be acquired within 180 days of when the original property was transferred.
  • An intermediary is used to facilitate the transaction.

These regulations must be closely followed, so it’s necessary to work with an experienced real estate advisor to navigate this process properly. Like-kind exchanges aren’t always the best answer for a business, and other options like reverse 1031 exchanges also exist.

To discuss complex real estate tax planning strategies further and learn more about like-kind exchanges, please contact our team to schedule a meeting.

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