Is a Like-Kind Exchange a Good Option for Your Business?
When companies sell properties, they must pay taxes on any gain they receive. Like-kind exchanges, qualified transactions in which companies trade properties, may be carried out without any immediate tax consequences. However, they must satisfy Internal Revenue Service (IRS) rules, which include the following:
The properties must have the same “nature or character,” as set forth in IRS guidance.
The exchanges can be business or investment properties put to a productive use.
The exchanges cannot involve inventory, most securities and some other assets.
Taxes must be paid on any cash or non-similar property that is part of the deal.
Owners of investment and business property may qualify for a Section 1031 deferral. Individuals, C corporations, S corporations, partnerships, limited liability companies, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.
Keep in mind that like-kind exchanges are tax-deferred transactions, not tax free. When a company eventually sells the property where an exchange was received, it must pay tax on any gain from its original investment. In the meantime, the business/company can use the funds it would have paid in taxes, and it has acquired a new property that may better suit its needs without necessarily making a cash outlay. For more information regarding strategies for like-kind exchanges and related tax implications, contact us today.