This Podcast is in response to requests for general information regarding an exchange of like-kind properties between you and a party who is related to you.
Generally, you recognize no gain or loss on the exchange of real property you held for the productive use in a trade or business or for investment if you exchange that property solely for real property of like kind that you also will hold either for productive use in a trade or business or for investment. Such an exchange is referred to as a “like-kind exchange.” Under a like-kind exchange, the gain you realize on the exchange of property for replacement property does not escape tax – the tax on the gain is merely deferred until the replacement property is sold.
Special rules apply to like-kind exchanges made with related parties, either directly or indirectly. If you exchange real property directly or indirectly with a related party, the original exchange will not qualify for tax deferral if either of the exchanged properties is sold or disposed of within two years of the transfer. The postponed gain becomes taxable at the time of the disqualifying disposition. This treatment applies to both parties to the exchange. For this purpose, a related party includes your spouse, child, grandchild, parent, grandparent, brother, sister, or a related corporation, S corporation, partnership, trust, or estate. An exchange made indirectly related party includes (1) an exchange made with a related party through an intermediary (such as qualified intermediary or an exchange accommodation titleholder, or (2) an exchange made by a disregarded entity (such as a single member limited liability company) if you or a related party owned that entity.
The two-year holding period requirement does not apply to dispositions due to death, compulsory or involuntary conversions, or non-tax-avoidance purposes. The running of the two-year holding period is suspended during any period when a party’s risk of loss with respect to the property is substantially diminished by (1) the holding of a put with respect to the property, (2) the holding by another person of a right to acquire the property, or (3) a short sale or any other transaction.
If you engage in a related party exchange, you must file Form 8824, Like-Kind Exchanges, in the year of the exchange and for the two following years.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.