The California real estate market is often complex and confusing – especially for those who are just entering the space. One element that makes things complex is the use of industry jargon and terms, such as like-kind exchanges.
When it comes to real estate, you usually hear the terms “buy” and “sell,” which makes the concept of an “exchange” confusing. Knowing what this is and the rules of a like-kind exchange can help you determine if this is a real estate process that would work for your situation.
Like-kind exchanges explained
A like-kind exchange is a term used for properties that are of the same character or nature, even if they differ in quality or grade. Most properties are considered like-kind, regardless of whether they are improved.
The exception is a property located in the U.S. and one located outside the U.S. Even in cases where the properties are both apartment buildings, they are not considered like-kind.
Rules to like-kind exchanges
If you are interested in making a like-kind exchange to avoid capital gains tax liability, you must follow the rules. Some things to remember include the following:
- Residential homes don’t qualify
- Properties must be similar exchanges
- You must close within 180 days
You must report the like-kind exchange using Form 8824 provided by the IRS. While this is true, if you engage in this type of transaction and receive other money or property, it must be recognized as a gain.
As you can see, like-kind exchanges can offer some benefits. Knowing the proper legal process and your rights are important to ensure you engage in this process properly. Utilizing help and guidance from professionals may also be beneficial.