Posted in Finance, Accounting and Economics Terms, Total Reads: 116
Definition: Like-Kind Exchange
Usually when we sell an asset we have to pay taxes on the capital gain we get on selling the asset but in Like- Kind Exchange we can sell the asset and then buy another asset of similar type and use the proceeds for buying that asset then the tax liability is not created. It is provided in the IRC code section 1031 that allows an individual to not pay taxed if the proceeds of one asset is invested in another asset.
The baseline is that the tax is not forgiven or it is not tax free, the tax has to be paid in future but not right now. This law is prevalent in United States. It is mostly applied to all business or investment properties and is not applicable to residential properties. It is not even applicable to the vacations homes. It’s just properties for trade purposes. The property doesn’t include any shares, bonds and notes.
The few features are the properties exchange should be of same type i.e. of same class and character and the next property should be purchased within 180 days of sale of first property. The same class and character doesn’t mean that the investor cannot upgrade the property. An individual can also hire an agent or an intermediary to hold cash between the time gap of selling and purchasing the asset. But if the intermediary pays back the cash to the person after 180 days so it becomes taxable.
Thus it provides various advantage to the investor as they don’t have to pay capital gain taxes at this time and moreover the portfolio has increased thus can lead to better returns.
Step1: Sell the property
Step2: Identify the property within 45 days
Step3: Purchase a replacement property within 180 days of sale of asset.