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Swapping property to defer taxes

George SaenzDear Tax Talk,
My husband and I are likely to owe a large amount in capital gains taxes after a sale of undeveloped land (business-zoned) to take place this year. In applying the like-kind exchange IRS rules for deferment of those taxes, would the new property we would acquire have to be undeveloped, business-zoned land? Or, for instance, would a multifamily rental or a vacation rental property also fulfill the requirement (being any property that is not our primary residence)? Lastly, how does one go about finding a holding company to receive sales proceeds pending closing on the new property? Many thanks for your help. -- Gail

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Dear Gail,
I think I'm becoming the like-kind-exchange guru. Since the postponement of gain on the sale of property is truly one of the best loopholes in the tax law, it seems to generate the majority of questions I'm asked.

Congress felt that if a taxpayer continues an investment in similar property, the taxpayer should have the opportunity to defer the gain on the disposition of that property. The rule applies to investment and business property, but not to personal-use property or stocks and securities.

There must be an exchange of like-kind property. Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. The exchange of real estate for real estate and the exchange of personal property for similar personal property are exchanges of like-kind property.

An exchange of city property for farm property, or improved property for unimproved property, is a like-kind exchange. I would say that either the multifamily rental or the vacation rental would qualify provided you or your family do not personally use the property in violation of the vacation home rules. The unit would not be considered like-kind property if it were a vacation home. A vacation home is a dwelling unit that you use as a home during the tax year if you use it for personal purposes more than the greater of:

1. 14 days, or
2. 10 percent of the total days it is rented to others at a fair rental price.

For example, if you rented the property for 300 days, you could use it for four weeks without violating the rules.

I assume the holding company you refer to is the escrow agent you'll need to enter into the like-kind exchange. Generally the title company that handles the disposition of the property can act as the escrow agent.

-- Posted: July 21, 2004




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