Like-Kind Exchange Get Robbed by Tax Reform

By Kyle Lusczakoski, CPA, MST – Manager, Doeren Mayhew

With the recent passing of the Tax Cuts and Jobs Act come some limitations on how like-kind exchange may be able to benefit your business. Here is a glimpse at how the once perks of this tax-saving strategy got robbed under new legislation.

Perks of Like-Kind Exchange

Like-kind exchange, which allow taxpayers to swap an asset for a similar one without triggering a tax obligation, have existed in the tax code for many years. Most commonly used on assets such as real estate, machinery and equipment, like-kind exchange allow taxpayers to continue to reinvest in similar types of property, and not have to pay taxes until cashing in on the property. For example, businesses could trade an old truck for a new truck, or an old crane for a new crane, potentially deferring any gain on the transaction.

New Rule Limitations

Under the old law, no gain or loss is recognized to the extent the property held for the productive use in a taxpayer’s trade or business (or held for investment purposes) is exchanged for property of a like-kind that is also held for productive use in a trade or business (or for investment).

Unfortunately, the new law, effective for exchanges completed after Dec.31, 2017, limits like-kind exchange to only real property held for the productive use in a trade or business (or for investment). Although most real property is like-kind to other real property, (i.e. improved real estate for unimproved real estate, commercial property for residential rental), please be aware that real property in the United States is not like-kind to real property located outside the United States.

If you want to better understand the greater impact of your business’s like-kind exchange, contact Doeren Mayhew’s tax advisors.

Want to reach the author? Email Kyle Lusczakoski or contact him at 248.244.3048.