• About
    • Our Team
    • International
    • Life @ Botwinick
  • Services
    • Accounting
    • Assurance & Attestation
    • Business Consulting and Advisory
    • Contract Compliance
    • Forensic Accounting
    • Tax Compliance & Planning
  • Industries
    • Contractors
    • Dental Practices
    • Distribution, Logistics & Warehousing
    • Manufacturing
    • Medical
    • Professional Services
    • Real Estate
    • Retail
    • Sports & Entertainment
    • Technology
  • Careers
  • Insights
  • Client Access
  • Contact
  • Client Login
  • Pay Online
  • Visit Our Office
  • LinkedIn
  • Facebook
  • Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
    (201) 909-0090
Botwinick-Logo
  • About
    • Firm Overview
    • Our Team
    • International
    • Life @ Botwinick
  • Services
    • Accounting
    • Assurance & Attestation
    • Business Consulting and Advisory
    • Contract Compliance
    • Forensic Accounting
    • Tax Compliance & Planning
  • Industries
    • Contractors
    • Dental Practices
    • Distribution, Logistics & Warehousing
    • Manufacturing
    • Medical
    • Professional Services
    • Real Estate
    • Retail
    • Sports & Entertainment
    • Technology
  • Careers
  • Insights
  • Client Access
  • Contact
  • Show Search
Hide Search

Insights

a like-kind exchange

Important Considerations When Engaging In a Like-Kind Exchange

Ken Botwinick, CPA 05/16/2022

A business or individual might be able to dispose of appreciated real property without being taxed on the gain by exchanging it rather than selling it. You can defer tax on your gain through a “like-kind” or Section 1031 exchange.

A like-kind exchange is a swap of real property held for investment or for productive use in your trade or business for like-kind investment real property or business real property. For these purposes, “like-kind” is very broadly defined, and most real property is considered to be like-kind with other real property. However, neither the relinquished property nor the replacement property can be real property held primarily for sale. If you’re unsure whether the property involved in your exchange is eligible for a like-kind exchange, contact us to discuss the matter.

Here’s how the tax rules work

If it’s a straight asset-for-asset exchange, you won’t have to recognize any gain from the exchange. You’ll take the same “basis” (your cost for tax purposes) in the replacement property that you had in the relinquished property. Even if you don’t have to recognize any gain on the exchange, you still have to report the exchange on a form that is attached to your tax return.

However, the properties often aren’t equal in value, so some cash or other (non-like-kind) property is thrown into the deal. This cash or other property is known as “boot.” If boot is involved, you’ll have to recognize your gain, but only up to the amount of boot you receive in the exchange. In these situations, the basis you get in the like-kind replacement property you receive is equal to the basis you had in the relinquished property you gave up reduced by the amount of boot you received but increased by the amount of any gain recognized.

Here’s an example

Let’s say you exchange land (investment property) with a basis of $100,000 for a building (investment property) valued at $120,000 plus $15,000 in cash. Your realized gain on the exchange is $35,000: You received $135,000 in value for an asset with a basis of $100,000. However, since it’s a like-kind exchange, you only have to recognize $15,000 of your gain: the amount of cash (boot) you received. Your basis in the new building (the replacement property) will be $100,000, which is your original basis in the relinquished property you gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

Note: No matter how much boot is received, you’ll never recognize more than your actual (“realized”) gain on the exchange.

If the property you’re exchanging is subject to debt from which you’re being relieved, the amount of the debt is treated as boot. The theory is that if someone takes over your debt, it’s equivalent to him or her giving you cash. Of course, if the replacement property is also subject to debt, then you’re only treated as receiving boot to the extent of your “net debt relief” (the amount by which the debt you become free of exceeds the debt you pick up).

Like-kind exchanges can be complex but they’re a good tax-deferred way to dispose of investment or trade or business assets. We can answer any additional questions you have or assist with the transaction.

© 2022

Tax Compliance & Planning tax planning, tax compliance

About Ken Botwinick, CPA

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Keep These DOs And DON’Ts In Mind When Deducting Business Meal And Vehicle Expenses

06/02/2023 . Business Consulting and Advisory, Tax Compliance & Planning

If you’re claiming deductions for business meals or auto expenses, expect the IRS to closely review them. In some cases, taxpayers have incomplete documentation or try to create records months (or years) later. In doing so, they fail to meet the …

Read More about Keep These DOs And DON’Ts In Mind When Deducting Business Meal And Vehicle Expenses

The IRS Has Just Announced 2024 Amounts For Health Savings Accounts

05/30/2023 . Business Consulting and Advisory, Tax Compliance & Planning

The IRS recently released guidance providing the 2024 inflation-adjusted amounts for Health Savings Accounts (HSAs). HSA fundamentals An HSA is a trust created or organized exclusively for the purpose of paying the “qualified medical expenses” …

Read More about The IRS Has Just Announced 2024 Amounts For Health Savings Accounts

If You’re Hiring Independent Contractors, Make Sure They’re Properly Handled

05/23/2023 . Accounting, Business Consulting and Advisory

Many businesses use independent contractors to help keep their costs down — especially in these times of staff shortages and inflationary pressures. If you’re among them, be careful that these workers are properly classified for federal tax purposes. …

Read More about If You’re Hiring Independent Contractors, Make Sure They’re Properly Handled

Subscribe to our Newsletter

This field is for validation purposes and should be left unchanged.
Botwinick-Logo

Quick Links

  • Home
  • About
  • Services
  • Industries
  • Careers
  • Insights
  • Contact

Contact Us

201 West Passaic Street
Suite 200
Rochelle Park, NJ 07662
info@botwinick.com
(201) 909-0090
(201) 909-8533

Follow Us

Visit Us

Footer-Map
© 2023 Botwinick & Company, LLC. All Rights Reserved. | Privacy Policy | Terms & Conditions
Website Design & Development by SHJ