Are like-kind exchanges of commercial or investment real estate properties still exempt from tax under the Tax Cuts and Jobs Act (TCJA)? Yes, but the rules are a bit complex. One thing to keep in mind is that the potential buyer of your property might not have any real estate you’re interested in buying. A qualified intermediary can help….learn more.

What is a like kind exchange?

Under Section 1031 of the Internal Revenue Code (IRC), you may defer gains on real property either used in a business or held for investment if, rather than selling it, you exchange it solely for property of a “like kind”.

What is considered “like kind”?

In the past, the IRS was fairly flexible on what property could be exchanged under this break. For example, you could swap an apartment building for a strip mall. Or you could swap one business or investment property for multiple replacement properties. Under the Tax Cuts and Jobs Act (TCJA), like kind exchange tax treatment is now generally limited to exchanges of real property (excludes personal property).

How do you qualify for tax free treatment?

The tax law definition of like kind real estate property refers to the nature of the property, not its quality or grade. You can swap a warehouse for an apartment building tax free, for instance.

There are two time restrictions to note:

1. You must identify the property that you will receive in the exchange within 45 days of transferring the property.
2. The property must be received within the earlier of 180 days after the transfer or due date of the tax return for that year (includes extensions).

Like kind exchanges involving multiple parties are called Starker exchanges and as long as you meet the tax law rules and deadlines, you can swap property tax free through this type of exchange.

What is a qualified intermediary?

Using a qualified intermediary to facilitate an exchange can help you overcome the timing hurdles.

Picture this: You (party #1) sell a property you’re relinquishing to a cash buyer (party #2). Party #2 pays a qualified intermediary (party #3) instead of you. Party #3 then holds the proceeds until you find an appropriate replacement property. The intermediary uses the sales proceeds to purchase the replacement property from its owner (party #4). To complete the exchange, the intermediary transfers the property to you.

Since no cash actually exchanges hands and the intermediary handles the funds on your behalf, you’re considered to have swapped properties tax free. You and the qualified intermediary must sign a Qualified Exchange Accommodation Agreement which states that the intermediary is holding the property to facilitate a tax-free exchange. Here, the intermediary also agrees to meet all the technical reporting requirements outlined by the IRS.

To determine if a like-kind exchange is worthwhile or questions on 1031 (like kind) exchanges, reach out to our Tax Services Team.

The TCJA…So Many Changes, So Many Questions…we can help you navigate this huge tax overhaul! Need help with your tax planning? Contact any member of our Tax Services Team.