- 1). Determine whether or not you will realize a taxable gain on the sale of your property. Subtract all closing costs and other selling expenses from your sale proceeds and add any improvements you made to the property to your cost basis.
- 2). Look for a comparable piece of real estate to exchange yours for. As long as the property you receive in return is considered "like-kind" by the IRS, then you can defer any gain on the exchange of the property. In order to be considered like-kind, your property must fall into the same depreciable asset class as the property you are receiving in return. Property must be of the same nature or character, but can differ in terms of quality or grade.
- 3). Report any recapture as income if you have depreciated your property previously. Furthermore, any boot you receive to equalize the transaction must also be counted as income.
- 4). Complete Form 8824 at the end of the year to report your exchange. The information you record on here will ultimately determine whether or not you must report any gain on the exchange of your property. You will provide complete information on the identity, holding periods and characteristics of both properties, as well as the nature of the transaction.
- 5). Report whether or not your exchange was made with a related party or was a confict-of-interest sale, or was an arm's length transaction. If the completion of the form results in no gain of tax, then you can defer taxation on the property until you dispose of it in a non-like-kind transaction or your death.
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