900 N. Kings Highway, Cherry Hill, New Jersey 08034
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The Online Advisor - December 1999
Don't pay tax; exchange property
Although the tax code can often be unforgiving, there is one area that provides a bonanza to taxpayers. This is the tax-free exchange. Such transactions allow taxpayers to postpone paying the tax on the disposition of their business or investment property. This "postponement" of tax can be temporary or permanent, depending on the circumstances.
Trade for "like-kind" property. For sales of property held for business or investment purposes, an individual can lock in substantial economic gain without incurring the tax bite which applies to most sales. The rules for tax-free exchanges are precise, however. A business or investment property must be traded for another piece of "like-kind" property or properties (i.e., business or investment real estate for business or investment real estate) of equal or greater value.
Unfortunately, there is one major catch: the person exchanging the property may not receive cash in the transaction and may not let the buyer assume a mortgage greater than the one he is giving up. If either of these conditions exist, some gain is taxable.
Expand to a three-party exchange. In an exchange, matching two parties whose properties are suitable to each other is rare. Where the parties aren't happy with each other's properties, like-kind exchanges often expand from a two-party exchange to a three-cornered exchange.
With proper planning and professional advice, individuals with highly appreciated property can often trade into another property without having to take care of Uncle Sam in the bargain. For details on this tax-saving strategy, give us a call.