Mommy Mentors Project
You May be Surprised at the actual Capital Gains Tax Rates!
by Teri Kaye, CPA
  Lani from Cooper City has 6 acres of real estate land. She plans on selling some of the land and using the proceeds to build a cabin on the remaining land. She asked whether she could defer gain on the sale of land under the like-kind exchange rules.

Teri likes the unconventional idea, but does not think the IRS will allow the deferral of gain in this instance. Internal Revenue Code Section 1031 allows a taxable to defer gain on an exchange of “like kind” property. Real property must be exchanged for real property and personal property must be exchanged for substantially the

same personal property (a car for a car, but not a car for a boat). Real property can be raw or improved land. There are very specific rules for the amount of time a taxpayer has to identify replacement property and for the entire transaction to be finalized. If the exchanges are not simultaneous, a “qualified intermediary” must be used to hold any cash proceeds. Done correctly, a like kind exchange is a great way to postpone paying tax.

With Lani’s situation, the IRS would likely look to a Tax Court ruling, Bloomington Coca-Cola Bottling Co. v Comr. In that case, a taxpayer conveyed an old plant and cash to a contractor in consideration for the construction of a new plant on the taxpayer’s own land.

The court held that the transaction was the purchase of a new facility and not an exchange of property, because the taxpayer already owned the land on which the new plant was constructed.

In similar cases, the courts and IRS have said that where the taxpayer is liable for construction costs and selects the construction manager, the taxpayer is buying the construction and not exchanging property.

In addition, the IRS has ruled that a building without the underlying land is not “like kind” property to improved or unimproved land.

So, Lani, no you cannot defer gain recognition by having a building constructed on property you already own.

If you have questions about a like kind exchange, or any other tax question, ASK TERI, at

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