What is a Like-Kind Exchange?
A like-kind exchange, also called a sale., is a transaction in which the buyer and seller effectively properties in order to avoid paying on the
How Does a Like-Kind Exchange Work?
John Doe wants to sell his commercial property for $600,000, which he bought for $400,000 as an gain that is taxable.
If John does a like-kind exchange, he can defer this by replacing the property with a “like-kind” property: another property that is similar in nature to the one he is selling. However, if John sells his property and more than 45 days go by without obtaining a replacement property, John may be subject to the capital gains tax, as well as a state capital gains tax. To speed things up and ensure compliance, he can contact a qualified intermediary and make a qualified exchange accommodation arrangement. The qualified intermediary is similar to an escrow company: It transfer John’s property to the buyer and transfer the replacement property to John.
By using a qualified exchange accommodation arrangement, an “accommodation party” holds John Doe’s property temporarily (or it can hold the replacement property temporarily). It is named as in the sale of the property and the later purchase of the replacement property.
Why Does a Like-Kind Exchange Matter?
A like-kind exchange basically allows an investor to defer a capital gain or loss on the sale of if the investor exchanges it for a “like-kind” property. By using a qualified exchange accommodations arrangement, an investor is able to avoid touching the proceeds from the sale of a property before the proceeds are reinvested, thus helping avoid paying any capital gains and assisting in the transaction.