A like-kind exchange is a tax-deferred transaction that allows for the disposal of an asset and the acquisition of another similar asset without generating a capital gains tax liability from the sale of the first asset.
Until the passage of tax legislation in December 2017, that could have included the exchange of one business for another—or one piece of tangible property, such as artwork or heavy equipment, for another. After 2017, a like-kind exchange applies only to the exchange of a business or real estate investment property for another property.
A like-kind exchange is used when someone wants to sell an asset and acquires a similar one while avoiding the capital gains tax.
Like-kind exchanges are heavily monitored by the IRS and require accurate bookkeeping to ensure that no tax penalty is incurred.
Taxes under a like-kind exchange are deferred, not eliminated.
Important Aspects of a Like-Kind Exchange
There are several important considerations to keep in mind with a like-kind exchange to ensure that a tax liability is not created upon the sale of the first asset:
- The asset being sold must be an investment property and cannot be a personal residence.
- The asset being purchased with the proceeds must be similar to the asset being sold.
- The proceeds from the sale must be used to purchase the other asset within 180 days of the sale of the first asset, although you must identify the property or asset that you are purchasing in the like-kind exchange within 45 days of the sale.
- If our company is liable under the IRS 544 rules if the said company is an entity abroad
If the owner of the company is a US citizen, such individual will be subject to the US tax system under the income tax code (IRS 544.)
- If I am a US Citizen is required to report the sale of property abroad to the IRS.
You are liable to inform the IRS of the sales in 45 days following the sales. In order to benefit from the like-kind exchange, you must fill out a form stating that a new investment will be made in a foreign country in 180 days starting from the sales of the first property.
3.Is it required to establish a company in the country of the second property to establish the Like Kind Exchanges?
There is no legal obligation to establish a company in the country of the second property in order to benefit from like-kind exchange. However in case the property is sold over your company, we are of the opinion that the establishment of a company with a similar field of activity in the country of the second property would be less risky in terms of qualifying for like-kind exchange.