Tax Free Exchange Explained

Tax Free Exchange Explained

Internal Revenue Code allows a property owner of investment investment property to exchange investment property and defer paying federal and state capital gain taxes (20%+ applicable state taxes) in the event that they purchase a like-kind investment property. A tax-deferred exchange is a method by which a property owner trades one or more relinquished investment properties for one or more replacement investment properties of like-kind, while deferring the payment of federal income taxes and some state taxes on the transaction. The theory behind internal revenue code is that when a property owner has reinvested the sale proceeds into another investment property, the economic gain has not been realized in a way that generates funds to pay any tax. In other words, the taxpayer's investment is still the same, only the form has changed (e. g. vacant land exchanged for apartment building). Therefore, it would be unfair to force the taxpayer to pay tax on a paper gain.

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