†† Like Kind Exchange Law and Rules

Internal Revenue Code (IRC) Section 1031 allows businesses to defer the recognition of taxable gains on the sale of their business equipment when those assets are replaced with assets of a like kind or like class within prescribed time periods. These deferred exchanges allow companies to take advantage of like kind exchange benefits even if they purchase replacement property after the sale of qualifying relinquished property. Many companies have not taken full advantage of this strategy due to the administrative and business complexities associated with operating a Like Kind Exchange program. 

Like Kind Exchange (LKE) exchange rules were originally created with real estate transactions in mind; however, the same rules apply to the sale and exchange of Personal Property assets. These rules have been around since the 1930ís, but personal property exchanges were neither practical nor realistic until the technology was developed to make it possible to track and report these exchanges accurately and efficiently.

Taxpayers using LKE can dispose of and replace assets without recognizing taxable gain on the transaction. By exchanging one asset with a new, like kind asset, a taxpayer may "roll over" the tax basis of the old asset into the new asset being acquired. This "roll over" of tax basis continues indefinitely until a taxpayer disposes of the replacement asset in a taxable disposition by not replacing this property with property that is of like-kind. At that time, the taxpayer recognizes gain on the disposition of the asset.

The following property is specifically excluded from like-kind treatment by the internal revenue code:

  • Stock in trade or other property held primarily for sale (inventory)
  • Stocks, bonds, or notes
  • Other securities or interest
  • Interests in partnerships
  • Certificates of trust or beneficial interests

 
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