In-kind, also known as like-kind exchanges, is the process of exchanging property used for business for the sole purpose of another company similar to that (“like-kind”). This has long been allowed to occur under the Internal Revenue Code. The issue at hand is that there are now restrictions on this exchange.
Curious about what you need to know regarding in-kind exchanges? Read on to learn about the new policies and any other tips you may need to know
Changes to In-Kind Exchanges
New systems have now restricted in-kind to property held for use in a trade or business or for investments that fall under two pools. Those are known as Tax Cuts and Job Acts (TCJA).
Before, taxpayers could delay the gain generated by these like-kind exchanges of real and personal property. Personal property includes aircraft, boats, automobiles, trucks, and machinery or equipment. There is a benefit from postponing the gain and adjust the basis of replacement property under the former rule.
The change in the TCJA has resulted in the disposal of personal property. And its exchange with personal property of like-kind exchange is now taxable.
This poses a problem for real estate, who maintains the ability to defer gain on sale of real property vis like-kind exchange is prominent. The deferral allows for real estate dealers to get new real estate without paying taxes. This helps them to gain purchasing power.
Now there is a question on how to handle personal property, for example, furniture and fixtures. This personal property associated with the sale qualifies as a like-kind exchange.
Allocation of Sales Proceeds
It is recommended to split the sales from real estate into the categories of land, building, land improvement, and personal property.
This can be based on qualified appraisals. Qualified appraisals are concluded based on the value of the real estate and the allocation of the previous categories, income approach, or new-replacement-cost approach.
There are a few alternatives to make sure the sales proceed. You can use the values reported on the real estate tax bill or the residual net book value of the property.
For a sale of a business, the buyer and seller will allocate and agree upon the purchase price. The allocation of sales is then grouped into assets by filing Form 8594, Assets Acquisition Statement under Section 1060. Depending on the buyers’ and sellers’ plans for the property, it could alter the sales price allocation under the previously mentioned categories.
Commonly, proceeds from the sale are not allocated to personal property with the sales of real estate. This is because personal property is not why someone would buy.
Having little to no amount of the sales assigned to personal property will help not being able to defer the gain on the personal property through a like-kind exchange. The cause is a negligible amount of gain generated by the sale of personal property that will require deferral.
Abandonment of the Property
An alternative is to treat the personal property as abandoned before and not as part of a like-kind exchange. Abandonment is considered when the property is volunteered and permanently given up with the intention of ending ownership.
The key here is to not give it to anyone. In general, abandonment of personal property is not considered a sale or exchange. An example is leaving furniture on the street or side of the road. Sometimes net book value is left over on the personal property that was abandoned. That would be treated as a loss before the sale.
The seller can also choose to donate his/her personal property to a 501(c)(3) charitable organization before the like-kind exchange. If the donation is over $5,000, then a qualified appraisal is required. This will support the gift with the filing of Form 8283 or the Noncash Charitable Contributions.
How Does This Help?
These strategies intend to remove personal property from the equation before a like-kind exchange occurs.
This is helpful because the gain on personal property can no longer be deferred. This also allows taxpayers to generate an ordinary deduction. This is a result of the removal of the personal property that is either abandoned or donated before the sale.
Adjusting to the New Law
The TCJA now allows only the deferral on real property instead of differing the gain on personal property.
There are a few ways to consider minimizing gain recognition and potential taxable events. The options include a special allocation of sales proceeds. And the abandonment or charitable contribution of personal property. Before a like-kind exchange, tax planning should be completed to make sure you are getting the best outcome when doing your taxes.
Next Steps: Let Borshoff Consulting Guide You Through the Process
When in doubt, always work with a financial expert to navigate more complicated issues concerning real estate. That is where Borshoff Consulting comes in.
At Borshoff Consulting, we offer full-service tax consulting under the expert guidance of Sherry Borshoff, founder and CEO. Sherry is a federally licensed Enrolled Agent and known as Indiana’s Tax Expert. Borshoff Consulting offers financial services that include bookkeeping, payroll and tax solutions.
All our services are offered by a team that is friendly, knowledgeable, and will work with you to overcome any financial questions and concerns you may have. We are dedicated to helping your company both grow and thrive!
Get Started With Borshoff Consulting Today
If you are looking for assistance filing your taxes, have questions or concerns regarding the IRS, have additional questions about in-kind exchanges, or are in the market for a good tax consultant on retainer, look to Borshoff Consulting.
Give us a call today so we can answer any questions you may have.