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Nontaxable Exchanges
Certain exchanges of property are not
taxable. This means any gain from the exchange is not
recognized, and any loss cannot be deducted. Your gain or loss
will not be recognized until you sell or otherwise dispose of
the property.
Like-Kind Exchanges
The exchange of property for the same kind of property is
the most common type of nontaxable exchange. To be a like-kind
exchange, the property traded and the property received must be
both of the following.
- Qualifying property, and
- Like-kind property
Qualifying Property
In a like-kind exchange, both the property you give up
and the property you receive must be held by you for investment
or for productive use in your trade or business. The rules
for like-kind exchanges do not apply to property used for
personal purposes, such as your home.
Like-Kind Property
Properties of the same nature or character, even if they
differ in grade or quality are considered Like-kind properties.
The exchange of real estate for real estate is an exchange of
like-kind property. For example, the trade of land improved with
an apartment house for land improved with a store building, or
improved property for unimproved property, is a like-kind
exchange.
Deferred Exchange
A deferred exchange is one in which you transfer property
you hold for investment and later you receive like-kind property
you will hold for investment. (The property you receive is
replacement property.) The transaction must be an exchange (that
is, property for property) rather than a transfer of property
for money used to buy replacement property.
Identification Requirement
You must identify the property to be received within
45 days after the date you
transfer the property given up in the exchange. This period of
time is called the identification period.
Identifying Replacement Property
You must identify the replacement property in a signed
written document and deliver it to the other party involved in
the exchange. You must clearly describe the replacement property
in the written document. In the same manner, you can cancel an
identification of replacement property at any time before the
end of the identification period.
Qualified Intermediary
A qualified intermediary is a person who enters into a
written exchange agreement with you to acquire and transfer the
property you give up and to acquire the replacement property and
transfer it to you.
Receipt Requirement
The property must be received by the earlier of the
following dates:
- The 180th day after the date on which you transfer the
property given up in the exchange.
- The due date, including extensions, for your tax return
for the tax year in which the transfer of the property given
up occurs.
You must receive substantially the same property that met the
identification requirement, discussed earlier.
Reference IRS Publication 544
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