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Keep the heat off like-kind exchanges: Follow the rules

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The IRS is putting more “Sec. 1031 exchanges” under its watchful eye. One reason: The Treasury Inspector General has issued a report titled “Like-Kind Exchanges Require Oversight to Ensure Taxpayer Compliance.” (TIG Ref. No. 2007-30-172, 9/17/07)

Strategy: Toe the line. If you arrange a like-kind exchange of real estate or other property, watch out for increased IRS scrutiny.

Here’s the whole story: Under the tax code’s Section 1031, you can defer taxable gains when exchanging properties similar in nature, except to the extent you receive cash or other “boot” as part of the transaction. In that case, you must pay current tax on the gain up to the amount of boot received. Otherwise, you owe no tax until you sell the newly acquired property.

Both the property being relinquished and the property being acquired must be investment or business property. You can’t swap personal assets tax-free.

“Like-kind” refers to the property’s nature or character. Examples: You can swap improved real estate for raw land, a strip shopping mall for an apartment building, a marina for a golf course. But you can’t swap real estate for personal-property assets such as equipment or vehicles.

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