There are some big changes in 2018 when it comes to like kind exchanges! Going forward, like kind exchanges are only allowed for real property (i.e buildings, land, etc.) after 2017. This means that like-kind exchanges are not allowed for depreciable tangible personal property, and intangible non-depreciable personal property in 2018 (i.e. everything else).
Prior to the 2018, several kinds of assets could be exchanged to defer a taxable gain on the disposition of that asset. As long as the exchange was for a like kind asset used in a trade or business, a business owner could roll the taxable gain into the new asset.
For example, if a business owner had a fully depreciated piece of equipment valued at $10,000 they could trade the asset for a newer model and get a $10,000 trade-in credit. Instead of reporting a $10,000 gain on the sale of the asset the business owner would just reduce the cost basis of the new asset by $10,000, thus deferring the gain on the sale of the old asset.
The rules for real property are immensely complicated but for the most part, virtually any real property is like-kind to another real property. This is popular amongst real estate investors who will coordinate like-kind exchanges to avoid recognizing thousands, if not millions, of dollars in capital gains.
2018 Tax Law Changes
The Tax Cuts and Jobs Act of 2017 keeps the like-kind exchange treatment for real property but scraps the like-kind exchange for all other property.
This is a huge win for real estate investors but a big loss for those who regularly trade large or expensive pieces of equipment.
To reiterate, like-kind exchanges are allowed only for real property after 2017. Thus, under the new rules, no gain or loss is recognized on the exchange of real property held for productive use in a trade or business or for investment if that real property is exchanged solely for real property.
Some notable highlights:
- Real property is not eligible for like-kind exchanges if it is held primarily for sale.
- Real property within the US and real property outside of the US is not like-kind property.
Consult a Tax Advisor
There are several tax law changes in 2018 and it is a smart idea to consult with a tax advisor. Simply trading one real property for another real property doesn’t automatically constitute a like-kind exchange. Executing an improper exchange may result in substantial tax liabilities and potential legal action from investors.
To be safe, consult with a trusted tax advisor to walk your through the new tax law changes and how they may impact your business.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. Photo Copyright: <a href='https://www.123rf.com/profile_alexraths'>alexraths / 123RF Stock Photo