Tax Free Exchanges of Real Estate
Since the tax season is here, your tax professionals at InConcert Financial Group. are looking forward to helping you with your tax questions. This month's topic is Tax Free Exchanges of Property and how you can take the tax advantages.
You may exchange property without incurring a tax in the year you exchange it if you meet certain rules.
- The gain on an exchange may be taxed upon a later disposition of the property be- cause the basis of the property you received in the exchange is usually the same as the basis of the property you surrendered in the exchange.
- Example: If you exchange property with a tax basis of $20,000 for property worth $120,000, the basis of the property you received in the exchange is fixed at $20,000, even though its fair market value is $120,000. The gain of $100,000 ($120,000 - $20,000), which is not taxed, is called "unrecognized gain". If you later sell the property for $120,000, you will realize a taxable gain of $100,000.
- You cannot exchange U.S. real estate for foreign real estate tax-free.
- Tax-free exchanges between related parties may be taxable if either party disposes of the exchanged property within a two-year period.
- Property received in a tax-free exchange is held until death, the unrecognized gain escapes income tax forever because the basis of the property in the hands of heir will generally be the value of the property at the date of death. This is called step-up in basis.
- If the exchange involves the transfer of boot, such as cash or other property received, gain on the exchange is taxable to the extent of the value of boot.