Challenges of Like Kind Exchange
The IRS rules regarding IRC Section 1031 exchanges are detailed, form driven and complex. The administrative processes necessary to comply with the stringent LKE rules can be cumbersome and require substantial management effort and end-user involvement. In large part, this is due to the use of a Qualified Intermediary (QI) to accomodate IRS regulations regarding constructive receipt of funds.

Because of these challenges, many companies have not applied like kind exchange programs to their business property.  PwC-eLKE can help clients overcome these challenges by automating the administrative processes and eliminating the manual paperwork. In this way, PwC-eKE allows companies to obtain benefits under IRC Section 1031 while without significant additional effort.

Administrative Burden

Traditional exchanges utilitizing a QI involve a high level of interaction with the QI to meet the IRS requirements related to notifications related to identification, constructive receipt, and subsequent matching of exchanged assets. Utilization of this highly manual approach for ongoing, high-volume personal property exchanges are impractical and cost-prohibitive.  PwC-eLKE automates the functions required to satisfy IRS requirements for notifications, substantially eliminates manual processes and significantly reduces the costs associated with utilizing a QI.

In addition, PwC-eLKE provides for all record-keeping requirements necessary to satisfy stringent IRS reporting rules.  This includes detailed asset accounting and preparation of tax compliance documents, including Form 4562, Form 4797 and Form 8824.  In effect, PwC-eLKE becomes the system of record for tax compliance related to your LKE portfolio.

Identification and Matching
Under IRS LKE rules, replacement property must be identified within 45 days. In addition, the taxpayer must designate the replacement property as strictly intended for the same use as the relinquished property (Read examples). Under the eLKE program, this identification and designation process may be made by the taxpayer before acquiring the property into the LKE program. The PwC-eLKE software will automatically match eligible sales with eligible replacements and track the basis and corresponding depreciation on the new property and its layers.

 

Changes to Tax Law

The law and regulations related to like kind exchange have been amended several times over the past few years.  Each time a change occurs, the PwC-eLKE software is updated; this allows our clients to stay in compliance with without having to devote their own resources to tracking and implementing changes. Recent changes to regulations related to Like Kind Exchange include Step In The Shoes (SITS) deprecation, changes to bonus depreciation rules, state-specific bonus depreciation requirements, multiple depreciation books and short periods.

Cash Management
IRS rules mandate that the taxpayer cannot have access to the sales proceeds held by the qualified intermediary between the time that the relinquished property is sold and the replacement property is received.  The taxpayer also cannot pledge those funds as security for a loan; however, the taxpayer may be paid interest while the funds are on deposit with the qualified intermediary.  

PwC-eLKE implementation teams can help your company navigate these restrictions to reduce their impact on your company and the amount of funds maintained at the QI.

 
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