| Sales & Exchanges / Like-kind exchanges, general rules |  |
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A like-kind exchange is any exchange
(1) of property held for investment or for productive use in your trade
or business for (2) like-kind investment property or trade or business
property. For these purposes, "like-kind" is very broadly
defined. As long as the exchange is real estate (land and/or buildings)
for real estate, or personalty (non-real estate) for personalty, it
should qualify. However, exchanges of some types of property (for
example, inventory or shares of stock), do not qualify. Assuming the exchange qualifies,
here's how the tax rules work: If it's a straight asset-for-asset
exchange, you will not have to recognize any gain from the exchange. You
will take the same "basis" (your cost for tax purposes) in
your new property that you had in the old property. Even if you do not
have to recognize any gain on the exchange, you still have to report the
exchange on Form 8824. Frequently, however, the properties
are not equal in value, so some cash or other (non-like-kind) property
is tossed into the deal. This cash or other property is known as
"boot." If boot is involved, you will have to recognize your
gain, but only up to the amount of boot you receive in the exchange. In
these situations, the basis you get in the like-kind property you
receive is equal to the basis you had in the property you gave up
reduced by the amount of boot you received but increased by the amount
of gain recognized. Example.
Ted exchanges land (investment property) with a basis of $100,000 for a
building (investment property) valued at $120,000 plus $15,000 in cash.
Ted's gain on the exchange is $35,000: he received $135,000 in value for
an asset with a basis of $100,000. However, since it's a like-kind
exchange, he only has to recognize $15,000 of his gain: the amount of
cash (boot) he received. Ted's basis in his new building will be
$100,000: his original basis in the land he gave up ($100,000) plus the
$15,000 gain recognized, minus the $15,000 boot received. Note that no matter how much boot is
received, you will never recognize more than your actual
("realized") gain on the exchange. If the property you are exchanging
is subject to debt from which you are being relieved, the amount of the
debt is treated as boot. The theory is that if someone takes over your
debt, it's equivalent to his giving you cash. Of course, if the property
you are receiving is also subject to debt, then you are only treated as
receiving boot to the extent of your "net debt relief" (the
amount by which the debt you become free of exceeds the debt you pick
up). Like-kind exchanges are an excellent tax-deferred way to dispose of investment or trade or business assets. |
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