A change in Internal Revenue Service procedures has clarified the rules for reverse like-kind exchanges, a move that may encourage corporate expansion.
The law governing like-kind ex-changes, Section 1031 of the Internal Revenue Code, was adopted in 1921 to remove from a profit-and- loss statement property exchanged for like- kind property to be put to productive use in trade or business.
Before the adoption of the new procedures, confusion surrounded these kinds of transactions, especially when a property purchased for exchange purposes had to be bought before an existing property could be sold. Often a third party had to be enlisted to buy the new property and hold it until an existing property could be disposed of.
Businesses constructing "reverse" exchanges- -that is, exchanges in which a new property was bought before an old property was sold-- had only general tax law principles to guide them, explains Moore McLaughlin, a partner with Plourde Bogue McLaughlin Moylan, in Providence. "Now we know that if we do an exchange exactly as it's spelled out in the revenue procedure, then we're going to be safe," he says.
Businesses are attracted to ex-changes because of their tax benefits. If a company has been carrying a property on its books for a number of years, the new guidelines make it easier to avoid the tax consequences of disposing of the property.
"A company can build a new facility, sell its old one, join the two events into a like- kind exchange transaction, and avoid tax on the sale of the old facility," says Lou Weller, a principal in the National Real Estate Tax Services Group in the San Francisco office of Deloitte & Touche.