Internal Revenue Code Section 1031 Like Kind Exchanges (LKE) can be incredibly beneficial upon the sale of income producing property, but are one of the most underutilized sections of the tax code. A LKE is a transaction or series of transactions that allows for the disposal of an asset and the acquisition of another replacement asset without generating a current tax liability from the sale of the first asset. It is a way to defer your tax liability. Here is some basic information about the requirements of LKE.
- The Properties must be “Like Kind” – This relates to the use of the properties. Property held for productive use in a trade or business or for investment will qualify. Vacant land will always qualify for LKE treatment. Primary residences and properties held for resale (house flipping) do not qualify for LKE.
- 45 Day Identification Period – The Seller must identify the new property within 45 days of the closing of the sale of the current property. You can identify up to three properties of any value with the intent of purchasing at least one.
- 180 Day Purchase Period – The Second Transaction must be completed within 180 days.
- Use of a Qualified Intermediary – A qualified intermediary must be used for these transactions, as sellers cannot “touch” the money pending the sale of the current property and the purchase of the new property.
- Title must be mirror image in the current and new properties.
- If you receive any cash from the transaction, it will be taxed.
- Reverse LKE are also an option to consider—provided that title to both properties cannot be held in the same name at the same time.
With a LKE, taxpayer is able to avoid capital gains taxes until the exchanged property is later sold and cash proceeds are received. Proceeds that would ordinarily be paid to the government in the form of taxes are preserved and utilized to achieve higher levels of income and asset appreciation.
