This is a real thing. See, we defend against IRS challenges to all sorts of transactions. Maybe here, by our explaining some of the IRS rules, we might just help someone avoid an IRS audit. This particular article is about tax-free exchanges. Again, this is a real thing outlined in the Tax Code.

What is Meaning of “Tax-Free Exchange” of Property?

The easiest way to explain is by a real example.

True story: A client recently decided to dispose of a large plot of land. He realized that his family never followed through on their original plans for building on the old land. So the client changed his plans and found a different building project to pursue. He also found a different plot of undeveloped land—one that fit more closely with his new building plans.

But the new land was expensive. The client needed nearly all of the full value of the original land in order to acquire that different plot of land. He could sell the original land for nearly three times what it cost years ago. But doing so would create a significant gain, which would be heavily taxed. If he had to pay taxes on the gain, then he could never afford to acquire the new plot of land.

His solution was a “tax-free exchange” of property.

Under the Internal Revenue Code (also called the “IRC” or the “Tax Code”), there is a special law that allows people to dispose of one property for another, doing so without incurring any federal tax. If you could sell your property for a gain, IRC Section 1031 allows you to postpone paying tax on that gain. The trick is that you have to reinvest the proceeds (whatever you would receive in a sale) into a property that is similar to the one given up. If all the rules are met, this transaction would qualify as a like-kind exchange.

That gain mentioned above is deferred in a Sec. 1031 like-kind exchange. So is the tax—it is tax-deferred, but it is not tax-free.

But you should understand that like-kind exchanges under Sec. 1031 are not simple. The Tax Code and Treasury Regs. are quite detailed. For anyone considering such a transaction, we recommend hiring a Qualified Intermediary to facilitate the transaction. And because every transaction is different, always be prepared to have a Tax Defense Attorney defend your position.

Contact Tax Law Offices

If you would like to know if your property purchase may qualify, it’s time to reach out to us. We are your premier choice when it comes to finding tax resolution lawyers serving Naperville, Wheaton, Downers Grove, and surrounding areas. Give us a call today!