Sales, Trades, Exchanges
Question: I have heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?
What you have heard about is a transaction called a like-kind exchange. A like-kind exchange, when properly executed, can postpone the recognition (taxation) of gain essentially by shifting the basis of property sold to like-kind replacement property.
The basis of the property that you acquire in a like-kind exchange is generally the same as the basis of the property that you transferred. However, if you transfer money or other property (not like-kind) in addition to like-kind property, your basis in the property acquired is the basis of the property given up, increased by the amount of money or other property transferred.
There are several rules and restrictions that must be strictly adhered to in order for a successful exchange to take place. For example, when you sell your rental property, you cannot take actual or constructive receipt of the sale proceeds. You avoid actual or constructive receipt of the proceeds if you comply with one of the safe harbors set forth in the Income Tax Regulations or certain other publications of the Internal Revenue Service.
- Form 8824 (PDF), Like-Kind Exchanges (and section 1043 conflict-of-interest sales)
- Publication 544, Sales and Other Dispositions of Assets
Category: Sale or Trade of Business, Depreciation, Rentals
Subcategory: Sales, Trades, Exchanges