Accounting News and Notes

Duluth CPA on Utilizing Like-Kind Exchanges as an Investment Vehicle

Tax law has long allowed taxpayers to utilize Like-Kind Exchanges allow investors to buy and sell certain types of investment assets without paying capital gains taxes at the time of the sale. The  amount of the tax, which would normally be due, is instead rolled over into the newly purchased property. IRS tax code/taw law contains specific rules for like-kind exchanges, which must be followed in order to defer taxation. Rules for like-kind exchanges generally speaking apply to investment assets, such as real estate, but do not apply to items such as personal property, primary residences, second homes, and inventory.

Taxpayers who desire to pursue a like-kind exchange, should seek out and obtain a professional who handles these types of transactions on a full-time basis. Failure in any aspect of the nuances of the law as detailed will make the exchange null and void, leaving all or part of the gain taxable. There are many specific guidelines of which I have recapped a few below:

Requirements of a Like Kind Exchange

• Taxpayers cannot touch any of the cash proceeds or to the extent that you do they will become taxable.
• Taxpayers need to have held the property you are selling as an investment (i.e., the selling item cannot be an item that you have in inventory). If you cannot document that this item was owned by you personally, as an investment, then the like kind rules would not apply.
• Taxpayers to the extent you do not re-invest the full sales price you will have a pro-rata gain (i.e., if you sell an item for $500 that had a tax basis of $400 (therefore a $100 gain) and you bought an item for $150 then you would have to recognize a gain as follows: (350 of sales price not invested divided by $500 total sales price times 100 total gain equals $70 of gain has to be recognized).
• For a like kind exchange between two related parties then both parties to the transaction have to hold the property have to hold the assets for two years or the like kind exchange is voided and the gain recognized in the year transaction voided (i.e., transferred early).

Learn how we can enlighten you in this strategic piece of tax law helping to understand how you can legally defer taxes to another day. Though eventually you will have to pay the deferred tax liability, like-kind exchanges are a unique option in tax law to legally defer taxes to when the asset you are “exchanging for” are ultimately disposed.

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Award Winning CPA John Dillard is an Christian Speaker/Author and Certified Public Accountant in Duluth, GA. To See how he takes Christ along with him to work visit http://www.hiscpa.com/ and for his latest book Overcoming Life’s 9/11’s: Job’s Journey and a Voice of One: Nehemiah’s Prayer visit http://www.john-dillard.com/ or call John Dillard CPA today at 770.814.9304 (All Rights Reserved) Dare to Attempt Something so Great for the Kingdom of God that it is doomed to failure, lest Christ be in it!    

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