(1) What is an exchange of like-kind property?
For personal property, it is the "exchange" of similar types of property with similar usage by the Exchangor (taxpayer). The property type and use does not have to be identical, just similar. For example, an old automobile traded for a new automobile, both used in your business.
For real estate, the term “like-kind” is very broad. The properties do not have to be similar at all. However, both the relinquished and replacement properties must be “held for investment” or “used in trade or business.” For example, an apartment building for vacant land both held for investment.
CAUTION: The exchange of depreciable property for raw land may cause some taxable recapture of depreciation expense. Careful planning is essential when exchanging two different classes of real estate.
An exchange is one related transaction that ties together all properties involved. This is usually done by an exchange agreement.
This is in contrast to selling a property and then taking the proceeds and reinvest into another property by two unrelated transactions.
(2) Who is eligible to use an exchange?
A taxable entity holding legal title to the property, such as an individual, corporation, partnership, trust, limited liability company, etc. This strategy is not just for the wealthy. Any taxpayer may benefit by utilizing an IRC 1031 exchange.
(3) Are there general guidelines as to when I should consider implementing a tax-deferred exchange?
Generally, an exchange will be in your best interest if you meet most of the following requirements:
a) The property disposed of must have a realized gain.
b) You desire to continue investment in real estate.
c) The fair market value of the replacement property is higher than the fair market value of the property you relinquished.
d) The debt on the replacement property is greater than the debt on the property you relinquished.
e) You wish to reinvest all or most of the equity proceeds from the property relinquished into the replacement property. However, equity NOT reinvested will be taxable at the time of sale.
(4) Definition of Terms:
"TAXPAYER” or “EXCHANGOR" is the one seeking deferral of the tax consequences in an exchange, even if the transaction results in no tax due.
"RELINQUISHED PROPERTY" is the property the Taxpayer wants to dispose of in exchange for another property.
"REPLACEMENT PROPERTY" is the property the Taxpayer receives in the exchange transaction.
"SIMULTANEOUS EXCHANGE" is an exchange that takes place at one closing by the same closing agent.
"DEFERRED EXCHANGE" is not a simultaneous exchange. It is an exchange of properties pursuant to a written exchange agreement that ties together all properties involved in the transactions. The relinquished property is disposed of in one closing and the replacement property is acquired at a later closing within the proper time limits.
"TAX-DEFERRED EXCHANGE" is an exchange that involves the deferral (i.e. postponement) of income taxes.
"INTENT" is extremely important. Provisions in the listing agreements, purchase & sale agreements, exchange agreements, closing documents and escrow instructions are looked to in determining the taxpayer's intent at the time of exchange. Therefore, it is recommended that these documents carefully note that the subject property is destined for exchange and nonrecognition of gain is desired. There is no specific time limit to hold a replacement property. Intent determines if the actual holding period is reasonable.
(5) What is a tax-deferred exchange?
A tax-deferred exchange occurs when the replacement property is not acquired at the same time your old property is relinquished. Customarily, a title company is used as the qualified intermediary to:
(6) Are there timing considerations in a deferred exchange?
YES - TIMING IS CRITICAL!
The simplest way to do an IRC §1031 tax-deferred exchange is to simultaneously exchange the properties at the same closing. This rarely happens. In addition, multi-property exchanges may involve many separate closings. Timing considerations are as follows:
a) The replacement property must be "identified" in writing within 45 days of relinquishing the old property.
b) The identified replacement property must be acquired no later than the earlier of:
i) 180 days after the date of initial transfer of the relinquished property, or
ii) the due date, including extensions, of the exchangor's tax return for the year in which the transfer of the relinquished property occurred. Therefore, if your closing on the replacement property is scheduled to take place after the initial due date of your income tax return, you will need to request an extension of time to file your return.
NOTE: There are NO grace periods to extend these dates, even if the last day falls on a weekend or holiday.
(7) How many properties do I need to own before considering the exchange process?
Actually, you only need have ownership in a portion of at least one property. The benefits of an exchange are not dictated by the quantity of property involved; rather, by the amount of income taxes that can be deferred. Therefore, even the smallest investor may realize significant current tax savings by implementing a tax-deferred exchange.
(8) What are the advantages of an IRC §1031 tax-deferred exchange?
There are many advantages, such as:
a) Ability to use all the equity to acquire a replacement property.
By deferring the payment of the related income taxes on any "realized" gain, the investor effectively takes an interest-free loan from the government.
NOTE: A "deferral" is a postponement of the tax payment, not a forgiveness or elimination.
Example: Let's assume you have $100,000 of net proceeds from the sale of your property and the related income tax cost is $60,000. The balance of $40,000 is all that remains to reinvest into another property. If we assume a 20% down payment requirement, you could purchase a replacement property worth up to $200,000.
As an alternative, assume you exchange the property. The entire $100,000 of net proceeds can be used to purchase a replacement property worth $500,000!
b) Consolidation or diversification of real estate investments.
Example: By doing a "group" exchange of the equities in your three "fixer uppers", you may acquire one newer property with greater appreciation potential and less management hassle.
c) Obtain greater cash flow from the property.
Example: Exchange raw land, which usually is a cash drain, into an improved property with higher rental income potential.
d) Relocation of investment property.
Example: You move to another city and do not want to be an absentee landlord. Exchange the property at your old location for another property closer to your new location.
e) Exchange out of LOW basis property into HIGH basis property.
Example: Exchange nondepreciable raw land or an old depreciated building into a newer building to obtain higher depreciation deductions, which may result in greater current tax benefits.
f) Elimination or reduction of management problems.
Example: By exchanging your old management and repair intensive, high vacancy property into a newer property offering greater freedom from the day-to-day problems of rentals.
g) Exchange used as an estate tax planning tool.
Example: By exchanging property and holding it until the transferor’s death, his estate will receive a stepped-up basis in the replacement property. This will eliminate all of the deferred gain for income tax purposes at the time of death. In addition, if the estate is not subject to federal estate tax (net estate value under $2,000,000 in 2006), there will be NO TAX at all!
If the estate is subject to tax, careful consideration must be given to the combined effect of income tax and estate tax before deciding on the deferral of any gain.
h) Exchanges work even if capital gains tax rates are reduced.
There has always been tax associated with the sale of real estate. In addition, depreciation recapture is usually subject to a higher tax rate than capital gains. If future legislation reduces the taxable capital gains, the tax impact will be less. However, there likely will remain a significant tax cost on the disposition of your property.
(9) Are there any disadvantages to an IRC §1031 tax-deferred exchange?
There have been very few disadvantages since the Tax Reform Act of 1986; however, they should be carefully considered and evaluated by you and your advisors before proceeding with the exchange. Here are some of the most common disadvantages:
a) The depreciable tax basis of the replacement property is reduced by the amount of deferred gain. This lowers the annual depreciation expense deduction; therefore, reducing your future annual income tax benefits. However, this impact is minimized when you consider the time value of money and the 27½ to 40 year mandated depreciable life of your replacement real estate.
b) Additional transactional costs over a normal sale and repurchase. These include preparation of extra deeds & closing statements; additional recording, intermediary, tax advisor and attorney fees.
c) Limitations upon the use of your equity while implementing the exchange.
(10) What are the investment alternatives to exchanging real estate?
Anyone who owns real estate valued at more than its adjusted basis because of depreciation and/or appreciation, should consider a full or partial exchange. An IRC §1031 exchange is a means of achieving multiple investment goals. Alternatives to an exchange include:
a) Continuing to hold the property.
b) Sell the property, pay the income taxes and reinvest the remaining proceeds into another real property or other type of investment (such as stocks, CDs, etc.).
c) Sell the property on the installment basis and spread the tax cost over several years.
d) Refinance the property to obtain equity for further investment in real property or other type of investment.
CAUTION: Interest tracing rules apply to the new loan and may cause some of the interest to be nondeductible.
(11) What is qualified real estate for an IRC §1031 exchange?
Qualified real estate properties must meet all of these tests:
a) Both the property surrendered (relinquished) and the property received (replacement) in the exchange must be held by the taxpayer for "investment" or "trade or business use". It does not matter how the buyer of the relinquished property or seller of the replacement property use the property.
b) The property surrendered is "exchanged" for the property received in one related transaction. This is in contrast to "selling" the property and "reinvesting" the proceeds into a new property by two separate transactions.
c) The properties surrendered and received must be of "like-kind" (i.e. an investment property for another investment property; an apartment building for a shopping center; farm land for an office building; etc.).
IMPORTANT! Real property located within the United States and real property located outside the United States is NOT property of like-kind. When used in IRC §1031(h), the term "United States" only includes the 50 states and District of Columbia. Under limited circumstances, property in the Virgin Islands may qualify. However, property located in Puerto Rico and Guam is considered foreign and not qualified.
(12) Do all state laws treat exchanges the same as federal?
Most follow federal law, but not all do. States, such as Georgia, Mississippi and Oregon, require the replacement property be located within the same state as the relinquished property. Other states, such as California, Hawaii, Maryland, New York, may require tax withholding on the proceeds. This may limit the amount of cash being reinvested and trigger a taxable event.
(13) What types of property do NOT qualify for like-kind exchange treatment?
a) Stock in trade (inventory) or other property held primarily for resale.
b) Stocks, bonds, notes, certificates of deposits.
c) Other securities or evidences of indebtedness or interest.
d) Certificates of trust or beneficial interests.
e) Choses in action.
- A right to recover or receive money or other consideration or property. It is not considered property in itself.
f) Partnership ownership interest.
- An exception to this rule applies if the ownership entity has a valid election under IRC 761(a) to be excluded from the partnership tax rules. For example: Two friends own an apartment building together as a joint venture and the property is titled in their “individual” names, not in the name of the joint venture entity. They each report their share of operations on Form 1040, Schedule E; not as a formal partnership using Form 1065.
- Another exception may be if all partners want to split up. The partnership dissolves and distributes the real estate to the partners as tenants in common (TIC). Each TIC then exchanges his/her real property interest for a separate property under IRC §1031.
Observation: Receipt of the above items as proceeds in an exchange transaction will be taxable to the extent of the realized gain on the relinquished property.
(14) Do exchanges between related persons present special problems?
Yes. Persons mean individuals as well as ownership in taxable entities. Generally, the exchange will fail if either the taxpayer or the related person disposes of a property that either one received in the exchange within two (2) years of the date of the last transfer which was part of the exchange. Recognition of gain or loss is reported in the year of final disposition of the subject property by either the taxpayer or the related person. This eliminates the need to file amended tax returns.
(15) How many parties can be involved in an exchange?
At least two. Generally, three or four party exchanges are most common and involve the use of a qualified intermediary to transfer the deeds and hold any cash proceeds.
(16) I already have an accepted offer to sell my investment property. Can I still get into the exchange process?
Yes. In a forward exchange the process must begin before you close the sale of your relinquished property.
(17) Will an outright sale of an investment property and later reinvestment of proceeds qualify for §1031 exchange treatment?
Only if the transactions are related and documented by a properly drafted and executed exchange agreement. Otherwise, any realized gain on the sale will be "recognized" (i.e. currently taxable).
(18) What happens to the holding period of my old property?
If the relinquished property was a capital asset under IRC §1221 or was a trade or business asset held at least one year, the holding period is "tacked" onto the replacement property. This can be very important if future tax legislation requires a long holding period to take advantage of a new tax break.
(19) What happens to the tax attributes on my old property?
As in every transaction, it is important to evaluate the potential hidden tax consequences of disposition. Some of the more common tax attributes affected by the disposition of real property are:
(20) When would it be advisable to sell the property outright rather than exchange it?
a) If you have suspended passive activity losses, accumulated net operating losses or capital loss carryovers to offset much or all of the taxable gain.
b) If the disposition of your property will result in a LOSS. IRC §1031 treatment is NOT allowed because a loss can not be deferred.
(21) What is a qualified intermediary and why do I need one?
A qualified intermediary is like the middleman of the exchange process. It was created by the Internal Revenue Code as a "safe harbor" to facilitate exchanges and is not considered an agent of the transferor.
The Regulations define a "qualified intermediary" as a person or entity who enters into an exchange agreement and, as required by the exchange agreement, "acquires the relinquished property from the taxpayer, transfers the relinquished property to a buyer, acquires the replacement property and transfers the replacement property to the taxpayer". This "person" is usually a title insurance company. The "exchange agreement" is the instrument which ties the properties together into one related transaction. The intermediary cannot be a "disqualified person".
Generally, one or more parties to the exchange are not comfortable with taking title, even if only momentary, to a property that will be delivered to the other party. The obvious reasons are:
The use of a qualified intermediary is highly recommended in any exchange transaction to minimize the risks and protect your legal rights.
(22) What is a disqualified person?
A disqualified person is an agent of the transferor at the time of the exchange and is prohibited from acting in certain capacities, including as a trustee of a qualified trust, agent of a qualified escrow account, and a qualified intermediary. A disqualified person is a person who has acted as the transferor’s agent within the past two years of the date the first property is relinquished. Generally, this includes your employee, attorney, accountant, investment banker or broker and real estate agent or broker.
However, services performed by such persons for the transferor are not taken into account in determining whether the person is acting as the transferor’s agent if such services are solely:
Disqualified persons also include:
(23) Define and show me an example of realized gain?
"Realized" gain is the total gain incurred upon disposition of the property. It is the amount on which your income tax deferral is based. This includes short-term and long-term capital gains, depreciation recapture gain and ordinary income.
Note: "Gain" is not the same as "proceeds" received on the sale. Most often, the gain is significantly higher than the cash proceeds.
EXAMPLE 1: Realized Gain vs. Equity Proceeds
Let's assume you purchased an apartment building on 1/2/1986 for $130,000. Of this, $20,000 was allocated to land and $110,000 to building & improvements. The initial mortgage was $104,000 (80% LTV ratio).
On 12/31/2005, the property sells for $400,000 less sale expenses of $28,000. Over the years, the property was refinanced to pull out cash equity. The remaining mortgage balance is $250,000. The property is fully depreciated under the rapid 19-year ACRS method.
The result is a gain much larger than the actual cash proceeds due to a combination of property appreciation and accumulated depreciation expense. This is a very common experience in today's real estate market.
|Fair Market Value||$ 400,000|
|Less: Commission and selling expenses||- 28,000|
|Cost of Land & Building||$ 130,000|
|Less: Accumulated Depreciation||- 110,000|
|"REALIZED GAIN" on Property Disposition||$ 352,000|
|Amount Realized||$ 372,000|
|Less: Liabilities (mortgage)||- 250,000|
|"EQUITY PROCEEDS" on Property Disposition||$ 122,000|
(24) Define and show me an example of recognized gain?
"Recognized" gain is the portion of realized gain subject to current income taxes. It may be equal to or less than the realized gain.
Observation: In any given IRC §1031 transaction, there may be both recognized and unrecognized gains depending on the amount of boot received.
EXAMPLE 2: Recognized Gain vs. Realized Gain
Let's continue with the scenario presented in Example 1 above to see what the impact is of an outright sale and reinvestment of the after-tax proceeds as compared to disposing of the property in a tax-deferred exchange.
|Method of Property Disposition:||SALE||EXCHANGE|
|Amount Realized||$ 372,000||$ 372,000|
|Less: Adjusted Basis||- 20,000||- 20,000|
|Realized Gain||$ 352,000||$ 352,000|
|Less: Deferred Gain||- 0||- 352,000|
|“RECOGNIZED GAIN” (i.e. taxable)||$ 352,000||$ 0|
|Income Tax Currently Payable,
assumes combined tax rates of 25%
|$ 88,000||$ 0|
|Equity Proceeds on Disposition||$ 122,000||$ 122,000|
|Less: Income Tax Currently Payable||- 88,000||- 0|
|Net Proceeds Available For Reinvestment||$ 34,000||$ 122,000|
|Value of Replacement Property,
assuming a 20% Equity Position
|$ 170,000||$ 610,000|
This exemplifies the tremendous reinvestment advantage of a tax-deferred exchange.
(25) What is meant by boot?
"Boot" may be in the form of cash, personal property, mortgage assumptions, mortgage payoffs, excess mortgage liability relief, newly originated mortgages, expense proration charges & credits, security deposits, closing costs. Limitations on the taxability of boot apply, depending on the amount of liabilities transferred between the parties.
(26) Can I contribute additional cash to an exchange transaction?
Yes. Cash or boot is often used to balance equities between the properties. Giving cash or boot when you trade-up will add to your basis in the replacement property.
(27) Will receiving cash or boot from a closing disqualify my exchange transaction?
No. However, the receipt of cash or boot will generally be taxable in part or full. The timing of the receipt of cash or boot may qualify for installment sale reporting if it is received in the year following the sale. Advance planning is essential if you wish to remove cash by refinancing either the old or new property.
(28) Can I dispose of my property and provide seller financing for part of the sale price?
Yes. But the seller financing (land contract or mortgage note) is considered "boot" and is treated the same as if cash were received at closing. Since you do not receive the cash at closing, the value of the seller financing will not be reinvested into a replacement property. Therefore, you may not be able to defer the related gain on this portion of the sale proceeds. To preserve the full benefit of the tax-deferred exchange, consider the following strategies:
(29) If I must retain a land contract or mortgage note, can the related gains on the principal balance be spread over the term of receipt?
Yes. The installment method of reporting the gain is allowed and the tax consequences may be distributed over the life of the note provided the other requirements of IRC §453 are met.
CAUTION: Be aware that a disproportionate part of the gain from excess depreciation recapture may be taxed immediately as ordinary gain. This is a hidden trap on many installment sales of depreciated real estate.
(30) What about the mortgages on the properties exchanged . . . most have a "due on sale" clause? Does this create any problems?
To qualify as an IRC §1031 tax-deferred exchange, the properties are transferred "subject to" the underlying mortgages. If the lender allows, the mortgage may be assumed by the other party. More often, the property acquired is financed by the Buyer with a new mortgage.
(31) What is a reverse exchange?
This occurs when the replacement property is acquired before your old property is relinquished. Some reasons for this are:
An exchange accommodating title holder (EAT) is required for all properties. Operating income or loss belongs to the EAT. Strict timelines still apply. Due to the additional risks and EAT, the cost of a reverse exchange is considerably higher than a forward exchange. Generally, careful planning can tailor the transaction to meet the objectives of both the buyer and seller, without incurring the additional cost of a reverse exchange.
(32) Can you provide a sample time line to implement an exchange?
|Begin your planning by assembling a team of advisors. This will include your CPA, attorney, Realtor, lender and qualified intermediary. Ideally, this is done in advance of listing the relinquished property with your Realtor.|
|Search for potential replacement properties. This may be existing property or new construction. If the latter, other items to consider include selecting a lot, building contractor, design plans, permits, etc.|
|Start the financing process on the replacement property and obtain a pre-approval letter from your lender.|
|Prepare and execute the exchange agreement with a qualified intermediary.|
|Close on the disposition of your relinquished property.|
|Proceed with the identification of the replacement property. This must be done within 45 DAYS of closing the first relinquished property.|
|Complete the exchange by acquiring and taking title to the replacement property within 180 DAYS of relinquishing the old property.|
(33) Can I dispose of or acquire multiple properties?
Yes. If a deferred exchange involves multiple property transfers by the transferor and the properties are transferred on different dates, the 45 and 180 day requirements commence with the first relinquished property closing.
If a group of properties seeking tax-deferred exchange status is to be associated with one exchange, tie them together with a document stating the addresses of all properties within the group. Make this a part of ALL offers written on the properties.
IMPORTANT: The replacement property(ies) should only be acquired by the Exchangor after all properties within the exchange group are disposed of. If this does not occur, some relinquished property gains may not receive tax deferral.
(34) How do I describe the replacement property?
The replacement property must be "unambiguously" described in a written document, which means it can not be a general description like "an apartment building in Madison, WI". It will include a physical description of the property, a street address and/or legal description. In addition, if the property is to be constructed, we recommend including and/or referring to a copy of the blueprints as part of the identification.
(35) How do I formally identify my replacement property?
Replacement property is deemed to be identified by the transferor within the required 45-day identification period if the property is designated as the replacement property:
a) In a written document signed by the transferor and
• Hand delivered;
• Mailed (best by certified mail - return receipt requested);
• Telecopied (fax, email); or
• Otherwise sent (courier)
to the Qualified Intermediary and/or other party(ies) involved in the exchange who are not the transferor or a party related to the transferor (such as an attorney or CPA advising the transferor); OR
b) By a written agreement signed by ALL exchanging parties before the 45-day identification period expires, regardless of whether the agreement is sent to a party involved in the exchange; OR
c) The replacement property is acquired by the transferor prior to the expiration of the 45-day identification period.
(36) Can I identify alternative and/or multiple replacement properties?
Yes. The transferor may formally identify more than one property as a potential replacement property within the 45-day identification period. You do not have to purchase all of the identified properties. The maximum number permissible at any one time is:
a) Three Property Rule: Up to three (3) properties may be formally identified at any one time without regard to the properties' accumulated fair market values, or
b) 200% Rule: Any number of properties as long as the aggregate sum of their fair market values, as of the end of the 45-day identification period, does not exceed 200% of the fair market value of the property being relinquished by the transferor.
Incidental property exchanged that is part of a larger property is not treated as being separate from the larger property, if:
i) In standard commercial transactions, the incidental property is typically transferred together with the larger property, and
ii) The incidental property's fair market value does not exceed 15% of the larger property's total fair market value.
(37) Can I revoke the identification of a replacement property?
Formally identified property may be revoked anytime within the 45-day identification period. Revocation is to be made in a written document signed by the transferor and hand delivered, mailed, telecopied, or otherwise sent before the termination of the 45-day period to the party(ies) whom the notification of replacement property identification was sent. If the identification was made in writing, the revocation must also be made in writing. You may identify any number of properties during the 45-day period, as long as the aggregate rules above are adhered to.
CAUTION: Once the 45-day period expires, no property substitutions are allowed. To complete the exchange, you may only acquire property(ies) from the formally identified list.
(38) What happens if I do not properly identify and/or acquire a qualified replacement property within the time limits?
The exchange will fail and all property(ies) closed will be treated as taxable transactions. You may then withdraw your money from the intermediary escrow account after the critical date has passed.
(39) Who holds my money during a deferred exchange?
The equity proceeds from the disposition of the relinquished property are held in a qualified escrow account under the control of the qualified intermediary. A qualified escrow account is one where the transferor does not have an immediate ability or an unrestricted right to receive, pledge, borrow, or to otherwise obtain the benefits of the cash held until the earliest of the:
a) transferor receiving the identified replacement property; or
b) expiration of the 45-day identification period if the transferor has not identified replacement property prior to this time, which means the exchange has failed; or
c) occurrence of a material substantial contingency after the 45-day identification period that -
• relates to the deferred exchange;
• is provided for in writing; and
• is beyond the control of the transferor or a related party to the transferor; or
d) expiration of the 180-day exchange period if the transferor has not acquired the replacement property, which means the exchange has failed.
(40) Can I earn interest on my money held in escrow by the intermediary?
Yes, a growth factor is permissible. The receipt of interest or a growth factor is subject to the same restrictions placed on the equity in the escrow account. It is reported as interest income regardless if the transferor receives the cash or reinvests it into the replacement property.
(41) What if there is no equity in the relinquished property? Is an exchange still possible?
This may happen if the property is under the threat of foreclosure or the liabilities, closing costs and prorations result in zero proceeds. It is possible to do a tax-deferred exchange; however, having no equity to acquire a replacement property may pose logistical problems.
(42) Can I do a Build-to-Suit exchange?
Yes. The equity in the relinquished property can be used to acquire a replacement property to be constructed. This may be the best alternative when satisfactory existing property is difficult to find. When the replacement property is completed, it must be substantially the same property as the property that was identified.
To qualify for an exchange, the new replacement property does not necessarily have to be completed by the time the Exchangor takes title, but it must have the correct ratio of fair market value, debt and equity. However, any construction cost completed after the property is transferred to the Exchangor cannot be applied to the basis of the replacement property in order to satisfy the exchange value requirements.
(43) Are there any special income tax reporting requirements?
Yes, a number of forms may be involved:
(44) What are some planning opportunities to facilitate an exchange?
a) Reading and understanding this report is a step in the right direction. Next, assemble your advisory team BEFORE you start the process. This will allow you to better prepare for the exchange process and help minimize any risks.
b) To "buy" extra time to meet the 45-day and 180-day rules, plan ahead before any properties are listed or sold. Delay the closing date as long as possible on the relinquished property.
c) Identify a sufficient number of replacement properties to protect yourself, in the event you are unable to acquire your primary choice of replacement property.
d) If you have significant income tax consequences but are uncertain a qualified exchange can be accomplished, consider closing with an intermediary anyway. This gives you up to 45 days to explore your options and seek a replacement property. If you are unable to complete the exchange within the prescribed timelines, the exchange fails. You will receive the proceeds from the escrow account and treat the sale as a taxable transaction in the year the proceeds are received.
Observation: Having a bona fide intent to complete the exchange is extremely important. This strategy leaves the door open to shifting the tax consequences into the year following the sale of your old property.
e) Be aware of the tax return filing time line. If the tax-deferred exchange process overlaps into a second tax year and is not completed by the time your income tax return is due for the first year, it will be necessary to request an extension of time to file your income tax return for a date beyond the anticipated completion date of the exchange.
(45) Should I seek professional advice to implement the exchange?
It is highly advisable to use advisors experienced and knowledgeable of the intricate tax and legal issues of IRC §1031 tax-deferred exchanges. Ask your advisors how many exchanges they have successfully completed. If they are not comfortable with the process, seek the help of an expert for this transaction. Confidence in your advisor's ability is paramount.
Start by consulting with your tax advisor to determine the amount of potential income tax consequences and whether an exchange will be beneficial. Next, retain a qualified real estate broker to handle the sale of your old property and to locate a replacement property. Then retain the services of an attorney and a qualified intermediary, such as a title insurance company, experienced with the exchange process.
Petkovsek & Moran, LLP often works in conjunction with a client's regular tax preparer by advising and implementing the exchange process. When all property closings are completed, we will prepare the necessary documentation to be included with your income tax returns.
As you have learned, the tax-deferred exchange process is very useful tool for the all investors. However, overlooking just one technicality can destroy the entire exchange and create a fully taxable transaction. Exactly the opposite of what you had intended. That’s what makes this portion of tax law very unforgiving.
An exchange usually involves significant tax dollars. Remember, this is YOUR