In a like-kind exchange, if you exchange property for similar property used solely for business or investment, you might completely or partially defer gain on the exchange. If your gain is tax-deferred, you won't recognize gain and pay tax until you dispose of the new property.
Ex: Brenda exchanged a vacant lot with a fair market value of $100,000 for another lot worth $125,000 that Mary owned. When Brenda bought her lot several years ago, she paid $55,000 for it. Since Mary's land is worth more than Brenda’s, Brenda paid Mary $25,000 to make up the difference. Brenda didn't assume any of Mary’s liabilities, nor did Mary assume any liabilities from Brenda.
If Brenda transfers her vacant lot and doesn’t meet the like-kind exchange requirements, she’d have a gain of $45,000 that she must report on her return:
$100,000 (fair market value of the land today) - $55,000 (amount originally paid) = $45,000 gain
However, if Brenda and Mary qualify to treat the exchange as a like-kind exchange, Brenda doesn’t need to report any gain. She won’t recognize gain until she disposes of the property.
Brenda’s basis of her new property at the time of the exchange is the total of the property she gave up plus the cash she paid Mary:
$55,000 (basis of property Brenda gave up) + $25,000 (amount of cash Brenda paid Mary) = $80,000 (Brenda’s basis in her new vacant lot)
Properties in a like-kind exchange can differ in grade or quality. However, to be considered of a like-kind exchange, they must be:
In the same general asset class
Similar in nature
Similar in character
Ex: If you give up a rental home in need of repairs in exchange for another rental home that’s well-maintained, it’s a like-kind exchange.
To learn more, see IRS Publication 544: Sales and Other Dispositions of Assets.
You don't have to receive property on the day you give up property to qualify for a like-kind exchange. However, strict rules apply to tax-deferred exchanges. For a deferred exchange to qualify as a like-kind exchange, you must comply with the 45-day written notice. The notice needs to identify the like-kind property each participant will receive in the exchange.
You also must receive the replacement property the earlier of:
180 days (not 6 months, but exactly 180 days) of when you gave up your property
By the due date, including extensions, of your federal return for the year you transferred your property
You must prepare Form 8824: Like-Kind Exchanges for all like-kind exchanges.
Special rules apply to:
Multi-asset exchanges made with someone you're related to
Property you once used as your personal residence
Property you received that will become your personal residence
To learn more about reporting the exchange, see IRS Form 8824 instructions.