Words Count: The Thomas Howell Ferguson Blog

Like-Kind Exchange Transactions

By: THF

With the creation of websites such as Craiglist, BarterOnly, and TradeAway, we are transitioning to more of a barter economy. People are trading their unwanted items instead of selling them. Qualifying items that are traded have a different tax treatment than items that are sold, so it’s important to know the difference.

No gain or loss is recognized if property held for use in a trade or business, or for investments is exchanged solely for property of a like kind to be held either for use in trade or business or for investment. Even though no gain or loss is recognized typically in a like kind transaction, there are reporting and disclosures required on your tax return to document the transaction.

Like-kind property means property of the same nature or character, but not necessarily of the same grade or quality. A couple examples are exchanging improved real estate for unimproved real estate, or trading in a used vehicle towards the purchase of a new vehicle. Exchanges can include qualifying property in a business for business activity, business for investment activity, investment for business activity, or investment for investment property type activity. Property held for personal use, inventory, and securities do not qualify under the like-kind exchange provisions. 

There are other items to consider when dealing with like-kind exchanges, particularly if the exchange occurs with related parties. Additional rules and requirements must be followed when dealing with related parties.

Another thing to consider is whether or not “boot” is received in the transaction. Boot is property received in the exchange that is not like-kind property (including cash). The receipt of boot will cause a realized gain on an exchange to be recognized, thus defeating reasons for doing a like kind exchange (i.e. deferring a taxable gain). As a result, taxpayers must be careful and cognizant when there is a chance for boot property to come into play.

Like-kind exchange transactions provide taxpayers with the opportunity to get rid of an asset and defer paying some tax by adjusting the basis of the new asset received in return. Nonrecognition treatment for like-kind exchange is mandatory not elective. A taxpayer who wants to recognize a realized gain or loss must structure the transaction around the statutory requirements for a like-kind exchange. When it comes to tax planning, every taxpayer’s situation is different and there are a lot of items to consider. A Certified Public Accountant can help you evaluate your situation and determine which tax planning opportunities are applicable.

If you have any questions on like-kind exchange transactions, always consult a Certified Public Accountant. Submitted by: Michael Kalifeh, Shareholder, Tax Services, Thomas Howell Ferguson P.A. CPAs, (850) 668-8100.

Thomas Howell Ferguson is a Certified Public Accounting firm (CPA) with offices in Tallahassee and Tampa, FL. We employ over 85 CPAs in both the Tallahassee and Tampa offices. We specialize in audits, taxes, assurance, and business consulting for governmental, not-for-profit, small business, insurance, and SEC clients.