A General Guide to Tax Deferred Exchanges
By: P. Patrick Ashouri, Esq.
Identification
Why are the identification rules so time restrictive?
Is there any flexibility within them?
The current identification rules represent a compromise which
was proposed by the IRS and adopted in 1984. Prior to that
time there were no time related guidelines. The current forty-five
day provision was created to eliminate questions about the
time period for identification and there is absolutely no
flexibility written into the rule and no extensions are available.
In a delayed exchange, is there any limit to property
value when identifying by using the two hundred percent rule?
Yes. Although you may identify any three properties of any
value under the three property rule, when using the two hundred
percent rule there is a restriction. It is when identifying
four or more properties, the total aggregate value of the
properties identified must not exceed more than two hundred
percent of the value of the relinquished property.
An additional exception exists for those whose identification
does not qualify under the three property or two hundred percent
rules. The ninety-five percent exception allows the identification
of any number of properties, provided the total aggregate
value of the properties acquired total at least ninety-five
percent of the properties identified.
Should identifications be made to the intermediary or
an attorney, escrow or title company?
Identifications may be made to any party listed above. However,
many times the escrow holder is not equipped to receive your
identification if they have not yet opened an escrow. Therefore
it is easier and safer to identify through the intermediary
provided the identification is postmarked or received within
the forty-five day identification period.
Prepare Your Exchange
- Determine whether the property being sold and consideration
received qualifies for deferred gain treatment under §1031
of the Code, (e.g. interest in real estate vs. partnership;
purchase agreement vs. the right to purchase property (option);
fee simple vs. lease; cash vs. promissory note).
- Determine whether existing ownership of the relinquished property
is suitable to accomplish the exchange, (e.g. partnership
vs. co-ownership; individual vs. husband and wife; individual
ownership vs. trustee ownership). In other words, ask the
following question: Will the ownership of the replacement
property be the same as the relinquished property?
- Determine what types or kinds of replacement property are
suitable investments and determine whether or not that type
of investment will qualify as replacement property under §1031
of the Code.
- Determine the minimum requirements for deferring the gain
on the sale/exchange of the relinquished property, (i.e. equal
or greater fair market value (“fmv”) plus investment
of all of the cash or other proceeds for the sale).
- Determine the contemplated ownership or vesting of the replacement
property and verify whether the contemplated form of ownership
will permit the qualification of the exchange under the provisions
and regulations under § 1031 of the Code.
- Determine whether you will be contributing additional cash
to acquire the replacement property and whether you will be
requesting the return of your personal deposit for the replacement
property acquisition.
- Determine your lender requirements for the acquisition of
the replacement property. This pertains to the form of ownership
(e.g. single member limited liability company, husband and
wife, etc.)
P. Patrick Ashouri, Esq.
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