Like-Kind
Exchanges of Business Property
Use caution if you later convert a building to your
personal residence
When exchanging business or investment
property for property of a “like-kind,” no gain or loss is recognized on
the exchange. Therefore, no tax is paid at the time of the exchange on any
appreciation in the value of the property.
The like-kind exclusion is sometimes
combined with the exclusion of tax on the gain from the sale of a
principal residence. In effect, this combination can allow taxpayers to
avoid paying tax on the gain from the sale of their business or investment
property.
The American Jobs Creation Act of 2004, enacted on October 22, 2004,
addressed this issue of combining like-kind exchanges with the exclusion
of gain on the sale of a principal residence. As of that date, the
exclusion for gain on the sale of a principal residence may no longer
apply if the taxpayer acquired the principal residence in a like-kind
exchange within the past five years. In effect, this requires the taxpayer
to hold the exchanged property for a full five years before selling it and
taking full advantage of the exclusion of the gain.
While this change may reduce the
attractiveness of combining like-kind exchanges with the principal
residence exclusion, it doesn’t completely eliminate it.
