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How Like-kind Exchanges Can Help You

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Like-kind exchanges are a common tax deferral method that, when used properly, can lead to substantial tax savings. Like-kind means that an asset of one type is exchanged for another asset of a similar type. To simplify: it is a swapping of like property.  These exchanges are often referred to as 1031 Exchanges, as this is covered under Section 1031 of the Internal Revenue Code.

A “type” is defined as the character of an asset, but does not apply to the age or quality of an asset. Assets are classified into types based on the North American Industry Classification System (NAICS), which breaks out many different industries and product lines. Some types include a broad range of assets, which allows for valuable tax planning opportunities that every qualifying taxpayer should consider.

The mechanics of like-kind exchanges allow a taxpayer to defer recognizing a gain or loss on the sale of an asset by decreasing the tax basis of the new asset. Eventually the taxpayer will recognize the gain or loss when the new asset is sold, but taxpayers can push the recognition of gain out for many years, possibly indefinitely, if they are able to continue to perform like-kind exchanges.

Prior to entering into any like-kind exchange, consult a professional to avoid any potential issues that may disqualify the preferential tax treatment of the exchange. One common trap is that in order to qualify for like-kind exchange treatment, the transfer must occur within a 180-day window.  Typically, a qualified intermediary can help to navigate the logistics of the exchange, as well as maintaining the proper documentation to ensure favorable tax treatment.

Careful planning on how to structure the transaction can help your chances of being able to use this beneficial tax provision.  Questions about like-kind exchanges? Call your tax advisor or Berntson Porter representative at 425.454.7990.