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Property swaps can save tax dollars
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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 of.

"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."
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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 in Nebraska."

Intangible-property likeness
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 similar enough."

Rarely tax-free
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 is everything.

"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.'s corrections policy -- Posted: May 22, 2001
More stories by Pat Curry
Page | 1 | 2 |
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