What Is a Deferred Gain on a Balance Sheet?

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.

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.