A like kind exchange (LKE) under section 1031 of the tax code has been called the greatest tax strategy available to each and every one of us. Any sale of business or investment property potentially qualifies for the tax benefit. One of the great things about an LKE is that it is not a loophole in the Internal Revenue Code. It is considered an economic stimulus provision that has been part of our tax laws for over 90 years.
Example – How It Works
Susan bought a 4-unit apartment building in 2008 for $200,000. In 2016, Susan sells the property for $280,000. If she does not take advantage of an LKE, Susan will recognize over $130,000 of tax gain! The tax gain recognized will include not only the appreciation in value, but also the depreciation recapture. However, if Susan contacts WTP Exchange prior to the closing, the sale of the apartment building can potentially be structured as an LKE to reduce the amount of tax gain recognized to $0.
In order to benefit from an LKE, Susan must acquire like-kind property to replace the apartment building. The replacement property must be identified within 45 days of closing on the sale of the apartment building, and must be acquired within the 180-day exchange period. Although Susan must acquire a replacement property that is “like-kind” to the apartment building sold, the definition of “like kind” is very broad with respect to exchanges of real estate. For example, a golf course is considered to be like-kind to an apartment building.
To avoid recognizing any tax gain, Susan must acquire a replacement property that is equal to or greater in value than the property sold. Additionally, all of her equity in the apartment building sold must be reinvested in the replacement property. Any equity that is not reinvested in the replacement property will generally result in at least a partial recognition of tax gain.
By building the LKE tax strategy into an investment plan, a real estate investor can accumulate substantially more equity than an investor that is unaware of it. Click here to download a case study that illustrates the power of an LKE.
What Types of Properties Qualify for the Tax Benefit?
Any sale of business or investment property potentially qualifies for the tax benefit. Examples of qualifying properties include:
Multi-family rental properties
Certain vacation properties
Vacant land held for investment
However, it is important to note that property primarily held for sale does not qualify for the benefit. For example, a developer that constructs a condo and sells it to a buyer generally will not be able to take advantage of an LKE.
I’m Interested – What Should I Do Now?
One of the most important things to keep in mind is that you must contact us prior to closing on a sale or purchase of property. If you close on the sale of your property without WTP Exchange first structuring the transaction as an LKE, it is taxable! We do not charge anything for the initial consultation. Contact us via phone or email to discuss the facts of your transaction and whether an LKE is right for you. We can facilitate any type of LKE, including the more complex reverse and construction exchanges.