What is a Like-Kind Property?
Like-kind property is property that, for tax purposes, is similar in nature to property being sold. Like-kind property is a key component of sale., which are transactions in which the buyer and seller effectively properties in order to avoid paying on the
How Does a Like-Kind Property Work?
Let's assume 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 , 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 goes 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 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 Property Matter?
Exchanges of like-kind property basically allow investors to defer a capital gain or loss on the sale of . 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.