Los Angeles CPA Firm

Real Estate Gains – Property Exchange Can Defer Taxes

Commercial PropertyIf you are fortunate enough to own real estate that has appreciated substantially, you may be hesitant to sell the property and reinvest in another property because of the taxes you’d have to pay on your profit. Instead of selling, you might want to consider a “like-kind exchange.”

A like-kind exchange is a property swap. When all tax law requirements are met, a like-kind exchange allows you to defer your gain for tax purposes.

An Example

Pete exchanges a tract of land worth $500,000 for a building, also appraised at $500,000. He originally paid $300,000 for the land and he made no improvements to it. Because the deal is structured as a like-kind exchange, Pete’s $200,000 gain on the land ($500,000 value minus $300,000 cost) is tax deferred.

Tax deferred doesn’t mean tax free. For tax purposes, Pete’s cost basis in the building he acquired in the exchange is $300,000, the same as his cost basis in the land he gave up. So, if Pete were to turn around and sell the building for $500,000, he’d have to report a taxable gain of $200,000 at that time.

Which Assets Qualify?

The like-kind exchange strategy is available for investment property and property used in a trade or business. Real estate has to be exchanged for real estate, and personal property for personal property. Inventory and shares of stock aren’t eligible for like-kind exchange treatment, and various other restrictions apply.

Making a Deal

A like-kind exchange can be accomplished when properties are not of equal value. Typically, the owner of the less valuable property turns over enough cash (or other assets) to even out the exchange. Or one owner might agree to assume the other’s debt. Note that transactions involving cash, additional assets, and debt relief are not completely tax deferred.
Other variations on the basic like-kind exchange are possible. For example, it’s possible to structure an exchange that isn’t simultaneous. Or more than two property owners can be involved in the deal.

In the right situation, a like-kind exchange can be a significant tax-saving opportunity. We’d be happy to discuss it with you.

If you would like to learn more, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a California CPA Firm providing real estate accounting throughout Los Angeles and Orange County. Our founder has been licensed in California for over twenty years and we work with Real Estate Investement Trusts (REIT), Property Management companies, Real Estate Developers and Investment Groups, and Owner Operators.

Why Hire a Real Estate CPA Firm

Real Estate - O CtyThe real estate industry is very different from other industries, especially when it comes to accounting and tax issues.

The tax incentives for real estate are very different than other industries.  The timing of expenses, specialized services like cost segregation and 1031 exchanges, debt restructuring and tax deferral strategies can have huge consequences.  For instance, a real estate CPA firm can pull together these strategic pieces that will improve your bottom line that a local generalist can’t replicate.

Second, working with a CPA Firm that works with a wide variety of real estate clients enables them to add more value to your day-to-day business and key business decisions.  If warranted, they can bring specialized services to the table that a local generalist can’t possibly provide.  In other words, working with a CPA Firm that works with the right specialists reduces the risk of making business mistakes, missing key tax incentives, and add value immediately to you.

Third, having a small team of accountants that specializes in real estate accounting reduces your annual costs because their depth of knowledge on the subject matter is deeper and without having to charge you more.

As in any industry, there are economies of scale that can be gleaned by working with a specialist.  It is important to let specialists and experts handle matters that require additional expertise and can save you money.  A real estate business can benefit from specialized services when it comes to tax planning, capital spending, budgeting, accounting and estate planning.

And after you hire the best CPA Firm for your industry, you’ll soon realize how easy they make it appear on the surface.

If you would like to learn more, call 949-759-5626 and ask for Jerry Morey.

 

Morey & Associates is a California CPA Firm providing real estate accounting in Southern and Northern California.  Our founder has been licensed in California for over twenty years.