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Like-Kind Exchange

Like-Kind Exchange – IRS Sec 1031

Section 1031 of the IRC allows the exchange of similar asset held for investment purposes.

It is imposed upon real estate investments and may be used as a means of postponing capital gains tax.

The section is void in case the investor is selling an asset and buying one instead, for that is a tax event.

Thus, the deal is performed via a middleman who maintains the profits from the deal in an escrow account until the purchase is performed.

The seller has 45 days to identify the new asset and provide the middleman with a list.

The purchase itself should take place within 180 days of the sale date.

There is no limit to the amount of assets purchased in exchange for the one sold.

The new property will receive onto it the deducted cost, with several changes to the sold asset.

In this manner, the capital gains tax is postponed but not dissolved, and manifests in the next sale.

If the deal also incorporates the exchange of dissimilar assets (such as money), only a portion of the deal will postpone the capital gains tax.

FIRPTA laws make the implementation of this section difficult for foreign investors.

NOTE – section 96 of the Israeli income tax law elaborates upon property re-exchange and stresses that an asset held abroad does not conform to the section.

Thus, capital gains tax must be paid in Israel.

The section provides some abatement and preserves the tax as “credit” for future purchase,

given certain conditions (such as a law permitting in the origin country of income tax).

If excess taxes were paid, Israeli income tax is obligated to return them to the taxpayer with interest and linkage.

This report is done via form 8824. We urge investors interested in conducting such a deal to come to us for an advisory session.