A real estate exchange is when an investor is allowed to sell one property and reinvest all of the equity they receive from the sale into another property without recognizing any of the gain from the sale. This means that if an investor sells a property and then turns around and purchases another property with all of those earnings, they can defer the tax owed from the original sale.
There are benefits to conducting a real estate exchange, such as the ability to increase an investor’s net worth, or the ability to create a more positive real estate portfolio that will meet the investor’s current and future real estate and financial objectives.
In a real estate exchange, the property purchased with the proceeds of the sale must be what is considered a “like-kind” property. This means that they are alike in terms of characteristics, not quality. This is true regardless of whether or not the property is improved. It is important to note that real properties in the United States are not like-kind properties with real estate located outside of the United States. Another important point to make here is that “like-kind” property does not necessarily mean a single family residential property in exchange for another single family residential property. So if an investor no longer wishes to own a multi-family residence, they can still find a “like-kind” property to reinvest in.
Many investors in both commercial and residential real estate tend to get confused over how a real estate exchange works and tend to lose a lot of money in taxes that could have been avoided. While a person can not conduct a real estate exchange in connection with their primary residence, it can be conducted on any investment property. That means that if a person owns a duplex, for example, in which the owner lives in one part of the duplex, they can sell the other part of the duplex and purchase a “like-kind” property to defer taxes on that part of the property.
To avoid paying taxes on a real estate investment property, it is important that an investor speak to an accountant or real estate attorney regarding their needs and goals. This is the most effective way to clear up any misconceptions that an investor may have in connection with a real estate exchange and to ensure that they get the most from their investment and their money.