31.3 Exchanging Real Estate Without Tax

You may exchange real estate held for investment for other investment real estate and incur no immediate tax consequences. On a fully tax-free exchange of “like-kind” property, you do not recognize any gain realized on the exchange and you cannot deduct any loss. If you had a gain, the potential tax on the gain is postponed until you sell the new property for more than your basis. A tax-free exchange may also defer a potential tax due on gain from depreciation recapture and might be considered where the depreciable basis of a building has been substantially written off. Here, the building may be exchanged for other property that will give larger tax deductions.

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image Planning Reminder
Exchanging a Building for Land
A tax-free exchange may be advantageous in the case of land. Land is not depreciable, but it may be exchanged for a depreciable rental building. The exchange is tax free and depreciation may be claimed on the building. However, be aware of a possible tax trap if you exchange rental property for land and the building was subject to depreciation recapture: The recapture provisions override the tax-free exchange rules. The “recapture element” will be taxable as ordinary income.
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Fully tax-free exchanges.

To transact a fully tax-free exchange, you must satisfy these conditions:

  • The property traded ...

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