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The Internal Revenue Service allows taxes on gains from the sale of business or investment assets to be deferred if the transaction qualifies as a "like-kind" exchange. A like-kind exchange is essentially a swap of one property for a similar property. The gain becomes taxable when the replacement property is sold. The deferred gain and tax liability are reported on the firm’s balance sheet.
IRS Like-Kind Rules
The least complicated like-kind transaction is a straight swap. This happens when a business or investment property is exchanged for a similar property. A gain results when the property you receive is worth more than the one you give up. Under Internal Revenue Code Section 1031, you do not have to pay taxes on the gain until the asset is sold. The IRS says simply selling a property and buying another isn’t a like-kind exchange. The swap must be “integrated” as a single transaction. Assets that can qualify include investments such as real estate and equipment or other items used for business purposes. Inventory, stock or other owner equity and other securities do not qualify. A transaction that produces a deferred gain can include non-deferred items such as cash and unlike assets, but these may be immediately taxable. The increase in asset value is listed on the balance sheet in the assets section. The tax liability goes in the liabilities section and the net after-tax gain is added to the owner’s equity.
- Financial Dictionary: Deferred Gain
- IRS: Like-Kind Exchanges under IRC Code Section 1031
- Internal Revenue Service. "Like-Kind Exchanges - Real Estate Tax Tips." Accessed Oct. 3, 2020.
- Internal Revenue Service (IRS). "Topic No. 409 Capital Gains and Losses." Accessed Oct. 3, 2020.
- Internal Revenue Service. "Like-kind exchanges now limited to real-property." Accessed Oct. 3, 2020.
- U.S. Government Publishing Office. "Title 26 - Internal Revenue Code - Section 1031," Page 2053-2054. Accessed Oct. 3, 2020.
- Internal Revenue Service. "Instructions for Form 8824," Page 1. Accessed Oct. 3, 2020.
- Realty Exchange Corporation. "1031 Exchange if Selling at a Loss." Accessed Oct. 4, 2020.
- Barber Emerson. "Like-Kind Exchanges of Real Estate," Page 3. Accessed Oct. 4, 2020.
- Internal Revenue Service. "Instructions for Form 8824," Page 3. Accessed Oct. 4, 2020.
Based in Atlanta, Georgia, William Adkins has been writing professionally since 2008. He writes about small business, finance and economics issues for publishers like Chron Small Business and Bizfluent.com. Adkins holds master's degrees in history of business and labor and in sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.