Like-Kind Exchanges Post-TCJA

Prior to the TCJA (Tax Cuts and Jobs Act), exchanges of personal or intangible property such as machinery, equipment, vehicles, artwork, collectibles, patents, and other intellectual property generally qualified for nonrecognition of gain or loss as like-kind exchanges. However, under the TCJA only real estate is eligible for a like-kind exchange under IRC Section 1031. Today’s blog is going to discuss how a 1031 exchange works and how you can still accomplish a 1031 exchange in an unconventional method.

A 1031 exchange allows an investor to “defer” paying capital gains taxes on an investment property when it is sold, as long another “like-kind property” is purchased with the profit gained by the sale of the first property. The investor is essentially kicking the can down the road by choosing to pay the capital gains at a later date, namely, after the closing of the second property. In theory, someone could continuously sell and buy property, continue to execute like-kind exchanges, and never pay capital gains taxes. In actuality, there is usually only one sold property and one purchased property. While a 1031 exchange is the most common type of like-kind exchange, what happens if you already found the property that you want?

Enter the reverse 1031 exchange. In this like-kind exchange, the process is almost exactly similar except (as you can tell from the name) instead of first selling a property, the first step is to purchase a property. Both the 1031 exchange and reverse 1031 exchange require a qualified intermediary to serve as the sort of “middle man” in the exchange, responsible for escrowing the money to the responsible parties and being the intermediary between the party attempting the like-kind exchange and the other part.

The professionals at The Center for Financial, Legal and Tax Planning are more than well-equipped to answer your questions with regards to like-kind exchanges and even serving as a qualified intermediary for your like-kind exchange. Please contact us at (618) 997-3436 to setup a free consultation.