Question: What is a tax-deferred (tax free) exchange?
Answer: Tax-deferred exchanges are often referred to as tax-free. Certain exchanges allow investors to trade one piece of property for another piece without paying income tax on the transaction. If you sell a piece of business or investment property for cash, you may owe tax on the transaction. However, if you follow certain rules, you can exchange property for “like-kind” property and postpone the tax consequences of the sale. That allows you to keep all of your money invested instead of turning some of it over to the IRS.
Basically here’s how a tax-deferred exchange works.
1) You hire a qualified intermediary to coordinate the sale and hold the sale proceeds from your property. You have no access to the cash.
2) After a sale, you have 45 days to identify a replacement property and 180 days to purchase it.
3) Your intermediary forwards your money to the closing agent to complete the exchange.
4) Generally, you must replace property with property of an equal or greater value to achieve a totally tax-deferred exchange.
