can save tax dollars
The good news is that the IRS came out
with new regulations last fall that allow you to actually buy the
replacement property before you sell the one you want to get rid
"The IRS has been more liberal and
taxpayer-friendly in the tax-free exchange area than any other area
I'm aware of," Gordon notes. "The regulations and notices
over the last 10 years are helping people, and they wrote the regulations
in English instead of code-speak."
Plus, on the real estate side, virtually
any business or commercial property can be swapped for any other,
as long as it's U.S. for US or non-U.S. for non-U.S.
"In the context of real estate,
virtually anything works," he says. "You can swap mineral
rights for a shopping center or the Empire State Building for farmland
While the regulations have gotten easier on the real estate side,
they've tightened in the area of intangible property, such as vehicles
and office equipment.
"On personal property, they're getting
very specific," Raabe says. "If you're trading a truck,
you've got to get a truck. A Lexus isn't the same as a Land Rover
-- that's not like-kind. If you're exchanging a computer, you have
to get back a computer and not a telephone system."
Gordon, whose practice specializes in
high-end art collections, knows firsthand about the issues related
to these kinds of exchanges.
"We assume a painting is like-kind
with another painting, but is it like-kind with a sculpture?"
he says. "I don't know, and neither does the IRS. In real estate,
it's easy, everything qualifies. In personal property, it's more
complicated. For the most part, people go ahead and do it if it's
If it all sounds too good to be true, Raabe points out some important
items to remember. Usually, at least one of the parties ends up
with cash in hand and that will be taxable. Plus, if the swap includes
buildings with mortgages, the person whose mortgage principal is
reduced will pay tax on that reduction as well.
Then, the QI will charge a fee, and even
though there's no tax, you still have to file a Form 8842 with your
taxes. It's also up to you to do the record keeping so that you
maintain the tax-free nature of the trade.
And then, of course, it's not literally
tax-free, he says, because the tax isn't eliminated, it's just delayed
until you actually sell it for a profit.
But in taxes, Gordon points out, deferral
"At some point you have to pay the
taxes, but if I pay $1 of tax today, it costs me a dollar,"
he says. "If I pay that five years from now, I can take 80
cents now and put it in the bank and in five years, it will be worth
a dollar to pay the tax. The way the tax law works, on death everything
gets a step up in basis. If you hold it until you die, you eliminate
the tax problem."
For more information about like-property
exchanges, download IRS
Publication 544, Sales and Other Dispositions of Assets.