Deferring Taxes with a Like-kind Exchange

If you would like to trade one property for another, consider deferring taxes with a like-kind exchange. It may help you to save some taxes.

The like-kind exchange rules permit owners to trade certain appreciated property held for investment or for use in a trade or business for similar like-kind property without recognizing taxable gain. Instead, the owner transfers his or
her \”basis\” (generally, the cost of the original property, plus improvements) to the new property.

Example.

Jane has an empty real estate parcel she originally bought for $100,000. The parcel is now worth $130,000. She would like to trade it for a parcel that Bill owns, also worth $130,000, because she believes his property has more potential.
With a like-kind exchange, Jane may exchange her property for Bill\’s without being taxed on the $30,000 of appreciation on her property, and her original cost basis of $100,000 will be transferred to the acquired property.

Several restrictions apply. First, the properties exchanged must be of a like kind. However, this requirement is broadly defined, \’so exchanges of realestate or of personal (non-realestate) property will generally qualify. However,
certain property won\’t qualify, such as inventory and securities. If the exchange involves cash or other nonqualifying property, the receiving party will generally have to recognize gain to that extent.

Additionally, if the exchange is with a \”related party\” (generally, certain family members or a greater-than-50%-owned corporation or partnership), gain must be recognized if the acquired property is disposed of within two years . •

Net Operating Losses Provide Tax Benefits

For many businesses, profits vary from year to year. However, with proper planning, even a bad year can be helpful from a tax perspective. Where business deductions exceed gross income, a taxpayer may have a net operating loss (NOL) that
can be used to offset income in another tax year, potentially generating a refund of previously paid taxes.

Who May Use an NOL?

NOLs are available to individual business owners, corporations, estates, and trusts. Partnerships and S corporations do not take NOL deductions, though their partners and shareholders may use \”passed through\” losses on their own returns.

How Is an NOL Applied?

The general rule is that a taxpayer may carry an NOL back two years and forward 20 years, though certain limited exceptions may apply. For example, an individual with an NOL that was caused by a casualty, theft, or disaster may· use a
three-year carryback period.

In general, the taxpayer will carry back an NOL to the earliest year it can be used and then carry it forward, year by year, until it is used up. The taxpayer may also elect to forego the two-year carryback and carry the loss forward for
the 20-year period. However, the general preference is to use an NOL sooner rather than later because a dollar of tax saved today is generally worth more than a dollar saved in the future.

How Is an NOL Calculated?

Calculations of NOLs can be complicated. For example, a noncorporate taxpayer\’s NOL is calculated without regard to any personal exemptions or NOLs from other years, and certain deductions for capital losses and nonbusiness items are
limited.

The general information in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.