One of the challenges with our market is that we are not selling like-kind properties
. It's not like buying an apartment based on the view [or] floor plan.
Under Section 1031 of the tax code, you can defer capital gains taxes on the sale of appreciated property by exchanging the property for another of "like kind." For real estate, like-kind properties
need not be of the same type or class, so long as each is used in a trade or business or held for investment.
73-476 (holding that an exchange of an undivided interest in real estate for a fee interest in real estate was an exchange of like-kind properties
), the IRS held that the exchange of a 25% undivided interest in Parcel 1 was of like-kind to the fee interest in Parcel 3.
* Sometimes taxpayers exchange property that satisfies the requirements for both the exclusion of gain for a primary residence under IRC section 121 and the nonrecognition of gain on the exchange of like-kind properties
under IRC section 1031.
First, comparable market sales of like-kind properties
are used to establish value.
The IRS is quite liberal in its interpretation of like-kind properties
and views almost all real estate as similar in nature or character.
The qualified intermediary safe harbor is now available to simultaneous transfers of like-kind properties
, whereas the other safe harbors are not.
It created the opportunity for undivided fractional interest in real estate and more importantly qualified TICs as like-kind properties
eligible for use in 1031 tax-deferred exchanges.
1031(b) and (c), if a transaction is not solely an exchange of like-kind properties
, any boot received (i.e., cash, debt relief or the FMV of non-like-kind property received) triggers gain (but not loss) recognition.
The definition of like-kind properties
is different for financial accounting than for tax purposes.
The Malkins started the sales process last year, at the same time they made it well-known that they were seeking like-kind properties
to effectuate the exchange.
In Letter Ruling 200236026, a corporation sought to dispose of certain properties and reinvest in like-kind properties
with the proceeds from the sales.