There is a procedure that can be used to defer
income taxes on the sale of an investment property when you follow that sale
with the purchase of another similar property. In summary, all six of the
following criteria must be met in order to qualify as a like-kind tax deferred
Both the property traded and the
property received must be held by the taxpayer for business or investment
property must not be held for sale to customers, such as inventory or
must be an exchange of like property. In general, any kind of real estate is
treated as of like kind with other real estate. By contrast, different kinds of
personal property (i.e. equipment and vehicles) are not treated as like kind.
bonds, notes and other securities do not qualify for a like kind exchange.
property to be exchanged must be identified in a written agreement within 45
days after the transferred property is surrendered.
property in the exchange must be received on or before the earlier of:
days after the transfer of the property given up, or
due date (including any extensions) for the tax return year in which the
transfer of the property given up occurs.
In addition, the properties must be transferred
through a qualified intermediary (such as a registered title company); any money
or other assets that are in addition to the exchanged properties must also flow
through the intermediary.
The cost basis of the taxpayers exchanged
property transfers to and becomes the cost basis of the new property and any
liabilities transferred to the other party in the exchange are netted against
any liabilities transferred to the taxpayer.
Additional information about tax deferred
exchanges can be found in IRS Publications