CONSULT A PROFESSIONAL
   Like-kind exchanges, under IRS Code Section 1031, are an excellent tax-deferred way to dispose of investment or trade or business assets. The rules and guidelines related to these exchanges can be complex.

   This brochure will give you a general understanding of what is required for an exchange to qualify as like-kind, but it should not be considered a replacement for professional assistance.

WHAT IS A LIKE-KIND EXCHANGE?
   A like-kind exchange enables you to dispose of appreciated property without being taxed on the gain by exchanging it rather than selling it. No gain or loss is recognized if property held for productive use in trade or business, or for investment is exchanged solely for property of a like-kind to be held either for productive use in trade or business, or for investment.

   Like-kind property means property of the same nature or character, not necessarily of the same grade or quality, For example, improved real estate could be exchanged for unimproved real estate. Exchanges can thus include business for business, business for investment, investment for business, or investment for investment property.

WHAT PROPERTY DOESN'T QUALIFY?
   Some types of property cannot qualify as like-kind exchanges. Excluded from non-recognition treatment are exchanges of:

• Stock in trade or other property held primarily for sale (i.e. inventory)
• Stocks, bonds, and notes
• Other securities or evidences or indebtedness or interest
• Interests in a partnership
• Certificates of trust or beneficial interests
• Choses in action

WHAT IF THE PROPERTIES ARE NOT EQUAL IN VALUE?
   If the trade is a straight assset-for-asset trade, you will not report and gain from the exchange. Frequently, however, the properties are not equal in value so some cash or other property is tossed into the deal. This is known as "boot". If boot is involved you will have to recognize your gain, but only up to the amount of boot you receive in the exchange. The remainder amount still qualifies for tax deferred treatment.

   In these exchanges, the basis you get in the like-kind property you receive is equal to the basis in the property you gave up reduced by the amount of boot you received and increased by the amount of gain recognized. Note that no matter how much boot is received, you will never recognize more than your actual ("realized") gain on the exchange. If the property you are exchanging is subject to debt from which you are being relieved, the amount of debt is treated as boot.

LIKE-KIND EXCHANGE EXAMPLE
   Ted exchanges land (investment property) with a basis of $100,000 for a building (investment property) valued at $120,000 plus $15,000 cash. Ted's gain on the exchange is $35,000: he received $135,000 in value for an asset with a basis of $100,000. However, since it's a like-kind exchange, he only has to recognize $15,000 of his gain: the amount of cash (boot) he received. Ted's basis in his new building will be $100,000: his original basis in the land he gave up ($100,000) plus the $15,000 gain recognized, minus the $15,000 boot received.

CAN I EXCHANGE PROPERTY WITH A RELATIVE?
   These exchanges are referred to as related party transfers and as such have special restrictions. The most common covered relationships that are considered related parties are your siblings, parents, grandparents, spouse, children and grandchildren. Partnerships and corporations in which you hold more than a 50% interest are also related parties for these purposes.

   If a like-kind exchange is made between related parties, nonrecognition treatment will be lost if either property in the exchange is disposed of within two years of the exchange. If you enter into a like-kind exchange with your relative or other related party, you must file a special like-kind exchange form, Form 8824, with Internal Revenue Service, not only for the year of the exchange, but for the two years following.

CAN I USE A QUALIFIED INTERMEDIARY?
   YES! The IRS has provided a safe harbor whereby you can use a qualified intermediary in a tax-deferred exchange of property for money which allows a taxpayer to defer gain as long as the taxpayer purchases like property within identifying and receiving guidelines.

TIMING OF THE EXCHANGE
   To be eligible for non-recognition treatment, the properties need not be exchanged simultaneously, but the exchange must meet two separate timing requirements. If neither of the requirements are met, the property received in the exchange is not like-kind and the tax deferral of the gain does not apply. The two requirements relate to the timing of the identification and the receipt of the property to be received in the exchange,

   In order to qualify as a like-kind exchange, the property to be received must be:

• Specifically identified on or before the 45th day after the date of the transfer of the property relinquished in the exchange.
  • Property is properly identified only if it is specifically designated as replacement property. The designation must be made in a written document.
• Actually received before the end of the exchange period.
  • The exchange period begins on the date that the relinquished property is transferred and ends on the date that is the earlier of 180 days after the date of the transfer or the due date of the income tax return (plus extensions) for the taxable year in which the relinquished property was transferred.

   The timing requirements must be strictly observed in order for the exchange to qualify for non-recognition of gain or loss. Please consult a tax professional to ensure that you do not lose qualification for a like-kind exchange.