J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

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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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 ...