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San Jose, CA real estate investment tax attorneyMajor financial transactions can have a variety of tax consequences, but taxpayers may be able to make use of tax laws and regulations to minimize the taxes they will be required to pay. Real estate transactions will often result in capital gains taxes being applied to the profits earned, but in some cases, a taxpayer may be able to use a “like-kind exchange” to defer the taxes owed. However, the Tax Cuts and Jobs Act (TCJA) of 2017 made some changes to the types of property that can be included in these exchanges, and the IRS recently issued new rules that will apply in these cases.

What Is a Like-Kind Exchange?

Section 1031 of the Internal Revenue Code allows taxpayers to defer capital gains taxes when selling certain types of property if the proceeds from the sale are reinvested into replacement property. The replacement property must be of a “like-kind” to the original property, meaning that it is property of the same type. Typically, business or investment property can be exchanged for other business or investment property.

Updated Rules for Section 1031 Exchanges

The TCJA restricted like-kind exchanges to real property used for business or investment purposes. It also eliminated certain types of personal or intangible property from being considered in these exchanges, including equipment and machinery, artwork and collectibles, vehicles, and patents or other intellectual property.

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