Use Property Swaps To Save Taxes
Instead of selling your commercial or investment property, consider swapping it for another piece of property. An exchange postpones the tax consequences. That allows you to keep your money invested instead of turning it over to the IRS.
Heres how a simple exchange works. You hire a firm to act as your qualified intermediary (QI). They coordinate the sale paperwork and hold the sale proceeds from your property. After the sale, you have 45 days to identify replacement property and 180 days to purchase it. Your QI coordinates the purchase paperwork and forwards your money to the closing agent to complete the exchange.
Lets compare a sale with an exchange.
John owns a commercial lot that he purchased in 1995 for $100,000. It is now worth $200,000. If John sells the lot, the tax on his $100,000 gain would be $20,000. He has $180,000 to invest in his next venture. (This example ignores selling expenses.)
Now lets see what would happen if John swapped the property instead of selling it. He hires a QI to process the exchange. John locates a duplex for $250,000. He has $200,000 to put toward the acquisition of the duplex, $20,000 more because he followed the exchange rules.
There are several different types of exchanges. Here are some examples.
Only investment property or property used in your business qualifies for an exchange. Generally, you must replace the property with more expensive property to achieve a totally tax-deferred exchange. Finally, your property must be traded for property that is of "like-kind" or similar in nature. For example, you can trade your rental house for a commercial building, but you couldn't trade it for Microsoft stock.
Though exchanges require careful planning and professional assistance, they can result in significant tax savings. We are here to help you. Give us a call.
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© Copyright 2001 Raymond S. Kulzick. All rights reserved. 010501.
This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.