If you trade a business property or investment for other business or investment property of a similar nature, you need not pay any tax on such transaction.
There are some business transactions where you trade your business property in order to get a more appropriate one. In such transaction, you need not pay any tax on the gain or claim any loss unless you sell that exchanged property. There are six main conditions which such a trader must meet in order to be eligible.
- The property you are trading must be a business property or an investment property. If the property is a personal property, like your home or your family car, then such trade does not qualify for non taxable treatment.
- The property which you trade and the property which you get back in exchange must not be for sale. So if you trade for merchandise, it will not be eligible under this category.
- The property should not be bonds, stocks, notes, certificates of trust or beneficial interest, including partnership interests. You can have a non taxable trade of corporate stocks, but under a different rule.
- The trade must be for a similar property. So the trade of real estate should be for real estate. Similarly, the trade of an apartment for a store building or trader of panel truck or a pickup truck can be considered as trader of like property. However the trade of a machine for a store building cannot be treated as a like property. Similarly personal property used mainly in United States with the personal property used mainly outside United States cannot be considered as a trade of like property.
- The trader has a time limit of 45 days. So the property which you intend to receive must be identified in writing within 45 days from the date you transfer your property.
- The property which you intend to receive must be received before 180th day from the date you transfer your property in the trade deal or before the due date for filing your tax return, whichever is earlier.
You should not trade the property with your related party. If you do that there will be special considerations for the treatment of such property.
You can also have a partly non-taxable exchange. So if you receive some money or and similar property in addition to the like property, IRS treats it as a partly non-taxable trade. In this case, you are required to pay taxes on the gain which you make out of such receipt of cash or non similar property. Remember, you cannot claim a loss in such exchange.
The reporting of such transaction – You have to report the trade of like property on form 8824. If you are able to figure a recognized gain or loss on form 8824, you need to report it on form 4797 or on schedule D of form 1040.