Normally, when companies sell properties, they must pay taxes on any gain they receive. Like-kind exchanges, transactions in which companies trade properties, may be carried out without any immediate tax consequences. They must satisfy IRS rules, however, which include:
- The properties must have the same “nature or character,” as set forth in IRS guidance.
- The exchanges can be business or investment properties put to a productive use.
- The exchanges can’t involve inventory, most securities and some other assets.
- Taxes must be paid on any cash or non-similar property that is part of the deal.
Keep in mind that like-kind exchanges are tax-deferred transactions, not tax free. When a company eventually sells the property it received in an exchange, it must pay tax on any gain from its original investment. In the meantime, though, the business/company can use the funds it would have paid in taxes and it has acquired a new property that may better suit its needs without necessarily making a cash outlay.