Like-kind exchanges: What exactly are they?

When entering the real estate market in California, you may encounter several unfamiliar terms. In fact, new terms pop up every few years as laws around real estate are implemented or removed. This article covers what are called “like-kind exchanges.” Understandably, this may be difficult to understand as the term “exchange” is not used often in real estate.

What exactly is a like-kind exchange?

In short, the term like-kind exchange is a tax-deferred transaction. This means that if a business or investor has a property that they want to dispose of but do not want to get a capital gains tax liability, they may be able to do so if they can exchange it for a similar property.

Rules to follow

Because real estate tax laws can be complex to navigate around, there are certain restrictions that investors and business owners should be aware of before they move on with the exchange. The following are some things to keep in mind before moving forward with like-kind exchanges:

  • It cannot be a personal residential home.
  • The properties must be similar exchanges.
  • You only have 180 days to use the funds to purchase another property.

State and IRS requirements

Most states across the country will have their own set of rules that you will need to follow along with the IRS rules. Beginning with the IRS, form 8824 must be completed and submitted to the IRS detailing the exchange. In addition, if gain recognized is included in the deal, form 8949 must be completed and filed with the IRS.

In terms of state laws, your respective state will require income tax to be reported and collected. However, if a like-kind exchange is made, you may be exempt if you fill out an exemption form at least 20 days before the deal is done.

Legal help with real estate transactions

As you can see from the information above, there are many areas of a like-kind exchange that must be addressed throughout the process. It may be beneficial to have an attorney experienced in real estate at your side during the entire process. Doing so may help you avoid tax mistakes.