Deferred Tax Treatment of Real Property | Accounting

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For over sixty-plus years, those who are owners of businesses and income property have had the good fortune of exchanging “like-kind” real property with the benefit of deferred tax treatment on capital gains. In this instance, the Internal Revenue Service rules are quite clear in determining what qualifies as “like-kind” property. Here, the qualification centers on the nature or character of the property as oppose to its’ grade or quality. This is a clear benefit specifically for those business owners who find themselves in emerging markets or markets experiencing underperformance due to the real estate credit fiasco.
Under Section 1031 (a)(1) of the U.S. tax code, the generally accepted interpretation for “like-kind” exchanges’ states that real property can be exchanged for another without triggering immediate tax exposure if the newly acquired property is worth more than the old one. In other words, a business owner has the opportunity to exchange any property of real estate, on a tax free basis, for any other interest in real estate as long as the new property proves to be of higher value than the one being exchanged.
Although Section 1031 (a)(1) places emphasis on real property to be utilized in a trade, business or investment, the interpretation is broad enough to allow land to be maneuvered in the same fashion.

About the Author

Luis M. Rodriguez is a CPA with the firm Gaetan, Johannes and Vaasco, LLP based in New York City. The firm has four offices aroud the country and over 150 affiliates around the world.

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