When is gain recognized in a like kind exchange

Per the IRS, offering the vacation property for rent without having tenants would disqualify the property for a exchange. If you want to use the property you swapped for as your new second or even primary home, you can't move in right away. In , the IRS set forth a safe harbor rule, under which it said it would not challenge whether a replacement dwelling qualified as an investment property for purposes of Section To meet that safe harbor, in each of the two month periods immediately after the exchange.

Before the law was changed in , an investor might transfer one rental property in a exchange for another rental property, rent out the new rental property for a period, move into the property for a few years and then sell it, taking advantage of exclusion of gain from the sale of a principal residence. Now, if you acquire property in a exchange and later attempt to sell that property as your principal residence, the exclusion will not apply during the five-year period beginning with the date the property was acquired in the like-kind exchange.

In other words, you'll have to wait a lot longer to use the primary-residence capital-gains tax break. A exchange can be used by savvy real estate investors as a tax-deferred strategy to build wealth. The many, complex moving parts not only require understanding the rules, but also enlisting professional help —even for seasoned investors. Internal Revenue Service.

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Changes to Rules. Delayed Exchanges and Timing Rules. Tax Implications: Cash and Debt. Moving into a Swap Residence. The Bottom Line. Key Takeaways A exchange is a swap of properties that are held for business or investment purposes. The properties being exchanged must be considered like-kind in the eyes of the IRS for capital gains taxes to be deferred.

If used correctly, there is no limit on how many times or how frequently you can do exchanges. The rules can apply to a former primary residence under very specific conditions. In order to qualify for a exchange, both properties must be located in the U. This is okay when a seller desires some cash and is willing to pay some taxes. Otherwise, boot should be avoided in order for a Exchange to be tax free.

The term "boot" is not used in the Internal Revenue Code or the Regulations, but is commonly used in discussing the tax consequences of a Section tax-deferred exchange. Boot received is the money or the fair market value of "other property" received by the taxpayer in an exchange.

Money includes all cash equivalents plus liabilities of the taxpayer assumed by the other party, or liabilities to which the property exchanged by the taxpayer is subject to. Boot can be in advertent and result from a variety of factors. It is important for a taxpayer to understand what can result in boot if taxable income is to be avoided. The most common sources of boot include the following:. Cash boot received during the exchange.

This will usually be in the form of "net cash received" at the closing of either the relinquished property or the replacement property. Debt reduction boot can occur when a taxpayer is "trading down" in the exchange. Sale proceeds being used to service costs at closing which are not closing expenses. If proceeds of sale are used to service non-transaction costs at closing, the result is the same as if the taxpayer received cash from the exchange, and then used the cash to pay these costs.

Taxpayers are encouraged to bring cash to the closing of the sale of their relinquished property to pay for the following non-transaction costs:. Property tax prorations on the relinquished property settlement statement can be considered as service of debt based on PLR Under this rationale exchange cash used to service tax prorations should not result in taxable boot.

Thus, effective January 1, , exchanges of machinery, equipment, vehicles, artwork, collectibles, patents and other intellectual property and intangible business assets generally do not qualify for non-recognition of gain or loss as like-kind exchanges. However, certain exchanges of mutual ditch, reservoir or irrigation stock are still eligible for non-recognition of gain or loss as like-kind exchanges. For example, an apartment building would generally be like-kind to another apartment building.

However, real property in the United States is not like-kind to real property outside the United States. Form , Like-Kind Exchanges, is used to report a like-kind exchange.