Tax Free Exchanges of Business Property

Tax Free Exchanges of Business Property

1030 Like-Kind Exchange Image
Like-Kind Exchanges of commercial real or personal property under Internal Revenue Code Section 1031 are tax exempt if handled properly. It is also commonly referred to as a “Starker” trust, a Section 1031 Exchange or a Tax Deferred Exchange.

The main advantage of a Like-Kind Exchange is that it allows the property owner to defer capital gains tax when the sale and replacement of property is structured as an exchange. The tax benefit translates into immediate cash savings of up to 28% for individuals; 35% for corporations.

Another advantage is that a taxpayer can upgrade or replace certain assets more cost effectively. Any taxpayer with the gain of more than $3,000 wishing to defer capital gains tax should consider setting up a Like-Kind Exchange account. An individual or corporation replacing existing business or investment property with other like-kind property should also participate.

A taxpayer is required to use a qualified intermediary, such as a bank, to take advantage of the capital gains deferral and cash savings. Sale proceeds must be paid directly to the qualified intermediary to preserve these monetary benefits.
Like-Kind Property

Like-Kind property includes real estate held either for investment or business use such as an apartment building, office building, manufacturing plant, or vacant land. Also included is personal property of the same kind or class and depreciable assets.

General Assets Classes are types of depreciable tangible personal property frequently used in business such as machinery, equipment, tractors, trailers, automobiles, buses, trucks, as well as airplanes and other modes of transportation.

Product Classes are types of depreciable property identified by a 4-digit Standard Industrial Code (SIC).

Like-Kind Exchange Account Restrictions

Replacement property must be identified within 45 days of closing on the relinquished property. Replacement property need not be under contract within the 45-day period. The account holder will have the opinion to identify alternate properties.

Replacement property must be acquired within 180 days of closing on the relinquished property.

If the restrictions governing the account cannot be met, funds on deposit plus interest earned, excluding fees, will be returned to the seller.

Consult with experienced tax attorneys when a tax-free exchange is contemplated. The lawyers at Hintermeister & Kundel have the background and business experience to help you in many facets of your business that will benefit your new or existing company. We have a solid foundation in tax law and a practical knowledge of business organizations and the issues that accompany the formation, operation, purchase, sale and termination of businesses. For more information, contact us today at 563.272.0003.
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