Tax Deferred Exchanges

1. You can trade one like-kind property for another like-kind property and defer the income taxes on the original property until a future date in a non-simultaneous closing.


2. If property is personal property then like-kind is defined very closely. IRS has multiple classes of personal property and like-kind property must be of the same class.


3. If property is real estate then like-kind is defined fairly broadly. Investment property for investment property. If there is less than a 15% element of personal property (furniture with an apartment project) then the personal property is ignored and the real estate would qualify. Investment property for residence property does not qualify.


4. Must use a "qualified intermediary" to handle the tax deferred exchange.
   1. Qualified intermediary can not be related to, an agent of or acted within two years as their accountant, attorney, real estate agent, etc of the parties involved.
   2. Banks and bank affiliates can be a qualified intermediary at all times.


5. Qualified intermediary must have a signed written agreement with the taxpayer that allows the qualified intermediary to acquire and disburse the relinquished property and the replacement property. The agreement should not allow the taxpayer access to the available funds until the end of the exchange period.
   1. The taxpayer has 45 days after the relinquished property is sold to identify replacement property (up to three properties or multiple properties not exceeding 200% of the value of the sold property) in writing in "unambiguous terms". If the taxpayer identifies more than the allowed number or dollar amount of properties then none of the property will qualify.
   2. The replacement property must be acquired within 180 days after the relinquished property is sold.
   3. Construction of personal property (such as a lobster boat) can qualify as long as the constructed property is completed and transferred to taxpayer during the 180 day time period.
   4. Construction of real property can qualify as long as the construction that has been identified (not necessarily the whole project) can be completed and the property transferred to taxpayer during the 180 day time period.
   5. All construction projects to qualify for tax-deferred status must have the qualified intermediary paying for all of the construction costs.


6. Gain or loss will be recognized to the extent that boot is received that can not be transferred until the end of the exchange period by the qualified intermediary. Boot is defined as:
   1. Cash
   2. Other property, which is defined as property that is not considered "like-kind" property, such as personal property and notes receivable.
   3. Mortgages that are relinquished are reduced by the amount of the mortgages that are assumed and the difference is considered boot.


7. Reverse tax-deferred exchanges where the replacement property is purchased prior to the relinquished property being sold can qualify in a tax deferred exchange.
   1. As of September 15, 2002, the IRS provided safe harbor for "parking arrangements", which are reversed tax-deferred exchanges.
   2. Terminology is different. Exchange accommodation titleholder instead of a qualified intermediary. Agreement still needs to be in writing.
   3. Must identify relinquished property within 45 days of exchange accommodation titleholder obtaining title to replacement property and must sell relinquished property within 180 days.
   4. Taxpayer can loan funds to exchange accommodation titleholder to acquire replacement property.
   5. The exchange accommodation titleholder must manage the property (if it is rental property) and show the net rental income as the exchange accommodation titleholder's income. Using the net rental as a part of the exchange accommodation titleholder's fee can mitigate this problem.

This outline is a summary of the tax-deferred exchange rules and does not contain all of the exceptions and all of the exceptions to the exceptions that could be part of a tax-deferred exchange. Please contact us with any questions you may have regarding your particular circumstances.

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Last modified: January 06, 2005

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