Property Taxes & Like-Kind Exchanges

What are the types of like-kind exchanges?

1. Simultaneous swap (simplest) 2. Deferred exchange 3. Reverse exchange

Deadlines for Like-Exchange Property

45 days from the date you sell to identify potential replacement property and notify the seller of the replacement property or your intermediary 180 days after the sale to complete the acquisition of the replacement property Failing to meet these deadlines may cause the sale of the property to be recognized in the current tax year.

Like-Kind Exchange Example - Doesn't eliminate taxes

A like-kind exchange doesn't eliminate taxes; it just pushes them into the future. Say you paid $20,000 for your warehouse and sold it for $30,000 ($30,000 - $20,000 = $10,000 capital gain). Rather than have the $10,000 profit taxed as a capital gain, the like-kind exchange allows the gain to be "passed on" to the new warehouse. The $10,000 gain will be factored into the tax calculation when you eventually sell the new warehouse -- unless you do another like-kind exchange, in which case the gain gets passed on to the next property you buy.

Reverse Exchange

A reverse exchange is somewhat more complex than a deferred exchange. It involves the acquisition of replacement property through an exchange accommodation titleholder, with whom it is parked for no more than 180 days. During this parking period the taxpayer disposes of its relinquished property to close the exchange.

Can businesses carry out like-kind exchanges?

Both individuals and businesses -- corporations, partnerships and sole proprietorships -- can carry out like-kind exchanges. However, the property involved must be used for business or investment. You could do a like-kind exchange on, say, boats used for a fishing business, but not for your family's sailboat.

What property qualifies for a Like-Kind Exchange?

Both the relinquished property you sell and the replacement property you buy must meet certain requirements. Both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, does not qualify for like-kind exchange treatment. Both properties must be similar enough to qualify as "like-kind." Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like kind to land. Real property and personal property can both qualify as exchange properties under Section 1031; but real property can never be like-kind to personal property. In personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property. As an example, cars are not like-kind to trucks. Finally, certain types of property are specifically excluded from Section 1031 treatment. Section 1031 does not apply to exchanges of: Inventory or stock in trade Stocks, bonds, or notes Other securities or debt Partnership interests Certificates of trust

When can you NOT make a deduction for property taxes?

Cannot deduct property taxes for: 1. Property you don't own 2. Rental property or business property (claim it as an expense, not a deduction) 3. Local improvements, like streets or sidewalks 4. Trash collection, library taxes, or anything else not directly related to property value

Co-op members and Multiple Owners - Property Taxes Deductions

Co-op members: Only claim your share of the amount paid by the corporation Multiple owners: Split the deduction by what each person paid

When CAN you make a deduction for property taxes?

Deduct property taxes for your: 1. Main home 2. Vacation homes 3. Land 4. Foreign property

Deferred Exchange

Deferred exchanges are more complex than a simultaneous swap but allow flexibility. They allow you to dispose of property and subsequently acquire one or more other like-kind replacement properties. To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations.

If its not on rental property you own where do you report property taxes paid?

Enter them in the Deductions & Credits section:

Who is responsible for reporting the real estate proceeds to the IRS for sale os exchanges of certain real estate?

For sales or exchanges of certain real estate, the person responsible for closing a real estate transaction must report the real estate proceeds to the IRS and must furnish this statement to you. To determine if you have to report the sale or exchange of your main home on your tax return, see the instructions for Schedule D (Form 1040). If the real estate was not your main home, report the transaction on Form 4797, Form 6252, and/or the Schedule D for the appropriate income tax form. If box 4 is checked and you received or will receive like-kind property, you must file Form 8824.

What is the form for Itemized Deductions?

Form 1040

What is the reporting form for Proceeds From Real Estate Transactions?

Form 1099-S

What Form do you use to report income for Sales of Business Property

Form 4797 Sales of Business Property 1. Sales or Exchanges of Property Used in a Trade or Business and Involuntary Conversions From Other Than Casualty or Theft—Most Property Held More Than 1 Year 2. Ordinary Gains and Losses

What form for Like-Kind Exchanges?

Form 8824

What does Form 8824 ask for?

Form 8824 asks for: 1. Descriptions of the properties exchanged Dates that properties were identified and transferred 2. Any relationship between the parties to the exchange 3. Value of the like-kind and other property received 4. Gain or loss on sale of other (non-like-kind) property given up 5. Cash received or paid; liabilities relieved or assumed 6. Adjusted basis of like-kind property given up; realized gain If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

Where do you report property taxes paid?

If it's for rental property you own, your property/real estate taxes are entered along with your other rental expenses.

What if you pay your property tax with your mortgage?

If you pay your property tax with your mortgage, you can only deduct it after your lender has paid the tax on your behalf. You can contact your lender to find out when they typically make these payments. (For example a lender might make the payment in October to cover the total amount of the following year's taxes; or they might make quarterly payments. It depends on the taxing authority in your location.)

When year do you claim a deduction for property tax?

In the year you made the payment. So if you paid your 2017 property tax on December 14, 2016, claim it on your 2016 return.

How do you compute the basis in the new property?

It is critical that you and your tax representative adjust and track basis correctly to comply with Section 1031 regulations. Gain is deferred, but not forgiven, in a like-kind exchange. You must calculate and keep track of your basis in the new property you acquired in the exchange. The basis of property acquired in a Section 1031 exchange is the basis of the property given up with some adjustments. This transfer of basis from the relinquished to the replacement property preserves the deferred gain for later recognition. A collateral affect is that the resulting depreciable basis is generally lower than what would otherwise be available if the replacement property were acquired in a taxable transaction. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax.

Are there restrictions for deferred and reverse exchanges?

It is important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately taxable. If cash or other proceeds that are not like-kind property are received at the conclusion of the exchange, the transaction will still qualify as a like-kind exchange. Gain may be taxable, but only to the extent of the proceeds that are not like-kind property. One way to avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete. You can not act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) can not act as your facilitator. Be careful in your selection of a qualified intermediary as there have been recent incidents of intermediaries declaring bankruptcy or otherwise being unable to meet their contractual obligations to the taxpayer. These situations have resulted in taxpayers not meeting the strict timelines set for a deferred or reverse exchange, thereby disqualifying the transaction from Section 1031 deferral of gain. The gain may be taxable in the current year while any losses the taxpayer suffered would be considered under separate code sections.

Exact Replacements Necessary as like-kind property?

Like-kind exchanges don't have to be exact replacements -- a warehouse for a warehouse, for example -- but they do have to be of the same "nature, character or class," the IRS says. Swapping a warehouse that includes land for vacant property or a factory with land would be a like-kind exchange, since all involve real property.

Who qualifies for 1031 Like-kind exchange?

Owners of investment and business property may qualify for a Section 1031 deferral. Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.

Form 8949: Corporation's Gains and Losses from Partnerships, Estates, or Trusts

Sales and Other Dispositions of Capital Assets Report a corporation's share of capital gains and losses from investments in partnerships, estates, or trusts on the appropriate Part of Form 8949. Report a net short-term capital gain or (loss) on Part I (with box C checked) and a net long-term capital gain or (loss) on Part II (with box F checked). In column (a), enter "From Schedule K-1 (Form 1065)," "From Schedule K-1 (Form 1065-B)," or "From Schedule K-1 (Form 1041)," whichever applies; enter the gain or (loss) in column (h); and leave all other columns blank

What form/schedule for reporting Capital Gains and losses

Schedule D (Form 1040) to report the following. 1. The sale or exchange of a capital asset not reported on another form or schedule. 2. Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit. 3. Capital gain distributions not reported directly on Form 1040 (or effectively connected capital gain distributions not reported directly on Form 1040NR). 4. Nonbusiness bad debts.

School Taxes Deduction

School taxes are deductible only if they are based on the assessed value of your property

What can the like-kind exchange include?

The exchange can include like-kind property exclusively or it can include like-kind property along with cash, liabilities and property that are not like-kind. If you receive cash, relief from debt, or property that is not like-kind, however, you may trigger some taxable gain in the year of the exchange. There can be both deferred and recognized gain in the same transaction when a taxpayer exchanges for like-kind property of lesser value.

What must there be to accomplish a Section 1031 exchange?

There must be an exchange of properties.

Like-Kind Exchange - Generally

Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.

What are the time limits to complete a Section 1031 Deferred Like-Kind Exchange?

While a like-kind exchange does not have to be a simultaneous swap of properties, you must meet two time limits or the entire gain will be taxable. These limits cannot be extended for any circumstance or hardship except in the case of presidentially declared disasters. The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient. Replacement properties must be clearly described in the written identification. In the case of real estate, this means a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified. The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above.

How do you report Section 1031 Like-Kind Exchanges to the IRS?

You must report an exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred.