Did you know that you can defer gain on the sale of real estate (and some other assets as well) if you do a “like-kind exchange”?
The rules are a bit complex….way too much to go over here in any kind of detail. However, let me run you through how it can work so you can see the value of it.
Example: Mike bought 4 pieces of land near Las Vegas 20 years ago. He paid $20,000 for each lot. He has just held them as investments for the last 20 years. Today, he gets a letter from a realtor in Las Vegas telling him that there are some people interested in buying one of the lots. Mike is surprised, so he calls the realtor and learns that property has really gone up and the potential buyer is willing to pay $220,000 for one of the lots. Mike pinches himself, breaks out a bottle of champagne, shouts “hallelujah” at the top of his lungs and starts singing.
Mike visits his CPA to find out how this might go down tax-wise. His CPA tells him that the gain is going to be $200,000 and Mike will have to pay around $60,000 in Federal and state taxes. Mike says he doesn’t want to pay any taxes. His CPA smirks and says “gee, I’ve never heard that before!”
Mike’s CPA asks lots of questions and determines that Mike doesn’t really need the money right now and would prefer to take the sale money and buy a big rental house in North Bend. Mike even says he has one in his sights and it will cost $220,000. What a coincidence.
Here’s the problem. If Mike sells the Las Vegas land, he will “net” out only $160,000 ($220,000 selling price less the $60,000 in taxes). So, he will not be able to afford the rental house in North Bend.
Mike’s CPA suggests that he do a “like-kind exchange” whereby he exchanges one property for the other. If Mike can successfully do that (and, yes, there are some hoops that have to be jumped through) he can avoid paying any tax currently.
What do you think of that? It’s a pretty neat way to go if the circumstances fit. There are several variations on this type of transaction. Like I said earlier, I do NOT want to make you experts. I just want to get your attention and alert you to this possibility.
If you think this might work for you or just want to explore it, please give my office a call and set up a meeting with me. I will be happy to discuss this subject with you.
CRAZY VARIATION: Mike owns a huge apartment building in Los Angeles. He does a “like-kind exchange” for 10 rental houses in Coos Bay. Can he “exchange” one apartment building for 10 rental houses? The answer is YES. Come see me and I’ll explain…..good stuff!!!!