There's good news concerning reverse like-kind exchanges. With a like-kind exchange, you trade business property you own for other business property in the same asset class. The result: no taxable gain or loss because the IRS sees the transaction as a nontaxable like-kind exchange, in which the tax basis of the old property becomes the tax basis of the new property.
With a reverse like-kind exchange, you acquire the replacement property before selling what you plan to give up, which may ease, say, a change in plant location. "Such an exchange would be used if the business owner identified the new property before he or she was ready to sell the current property," says Mark Luscombe, principal federal tax analyst with CCH Inc., a tax and business law information provider in Riverwoods, Illinois.
Thanks to a recent IRS ruling, reverse like-kind exchanges have become less perilous. Previously, various contractual arrangements used to help finance the acquisition and limit a business owner's liability often caused problems. "The IRS would say the accommodation party holding the property wasn't a valid legal holder, and the transaction wasn't subject to like-kind treatment, but to capital gains tax," explains Luscombe.
After the recent ruling, effective for exchanges taking place on or after September 15, 2000, the IRS says it won't challenge the qualifications of either the replacement or relinquished property if a "Qualified Exchange Accommodation Arrangement" is used.
This arrangement has a number of requirements. For example, the exchange accommodation holder must acquire legal title, explains Maury Golbert of accounting firm David Berdon & Co. in New York City. If this is a strategy you think you'd like to employ, check with your tax advisor for assistance
Great Falls, Virginia, writer Joan Szabo has reported on tax issues for more than 15 years.
- CCH Inc.
(847) 267-2440, www.toolkit.cch.com