JOHN B. KENNEDY         TAX CONSULTANT          CORPORATE FINANCE 

(816) 942-6190​​​
312 E. Woodbridge Lane
Kansas City, Mo.  64145

​EMAIL:  jbkennedy@sbcglobal.net       WEBSITE:    jbkennedytaxconsultant.com
​​
  
JOHN B. KENNEDY, TAX CONSULTANT
312 EAST WOODBRIDGE LANE,  KANSAS CITY, MO 64145

816-942-6190   JBKENNEDY@SBCGLOBAL.NET

WWW.JBKENNEDYTAXCONSULTANT.COM


TAX FREE PROPERTY EXCHANGES OVERVIEW

Tax free property exchanges is a common technique used by real estate developers and investors to avoid or defer income taxes on such transactions.

You may exchange investment or business property for "like kind" property without incurring a tax in the year of exchange if you meet certain rules.  Gain may be taxed upon a later disposition of the replacement property because the basis of the replacement property is usually the same as the basis of the property surrendered in the exchange.  Thus, if you exchange property with a tax basis of $10,000 for property worth $50,000, the basis of the property received in the exchange is fixed at $10,000 even though its fair market value is $50,000.  The gain of $40,000 which is not taxed at the time of exchange, is technically called "unrecognized gain."  If you later sell the property for $50,000, you will realize the taxable gain of $40,000.

Where property received in a tax free exchange is held until death, the unrecognized gain escapes income tax forever because the basis of property in the hands of an heir is generally the value of the property at the date of death.  If the exchange involves the transfer of boot such as cash or other property, gain on the exchange is taxable to the extent of the value of the boot. 

You may not make a tax-free exchange of US real estate for foreign real estate.

Tax-free exchanges between related parties may become taxable if either party disposes of the exchanged property within a two-year period. 



DEFINITIONS AND EXPLANATIONS                                                                                                                               P 2 of 2

*The term "like kind" refers to the nature or character of the property, that is whether real estate is traded for real estate.  It does not refer to grade or quality of the property or  whether the property is new or used, improved or unimproved.  Land may be traded for a building, farmland for city lots, or a leasehold interest of 30 years or more for outright ownership in real estate. 

*The IRS has two types of tests for property qualifying for tax free exchange status:  The like class test and the like kind test.  Under the like class test, there are two types of like classes, the General Asset Class and Product Class.  The like-class test is satisfied if the exchanged properties are both within the same General Asset Class or the same Product class. 

*Property which does not qualify for tax free exchange status:

            Real Estate used for personal purposes
            Foreign Real Estate
            Property held for sale
            Inventory or stock in trade
            Securities     
            Notes
            Partnership interests

*Tax free exchanges are reported to IRS on Form 8824.