A General Guide to Tax Deferred Exchanges
By: P. Patrick Ashouri, Esq.

All exchanges must close simultaneously (NO)

Although there was a time when all exchanges had to be closed on a simultaneous basis, they are rarely completed in this format any longer. In fact, a significant majority of exchanges are now closed as delayed exchanges.

Like-kind means purchasing the same type of property which was sold (NO)

Although the definition of like-kind has often been misinterpreted to mean the requirement of the acquisition of property to be utilized in the same form as the exchange property. In other words, apartments for apartments, hotels for hotel, farm for farm, etc. However, the true definition is again reflective more of intent than use. Accordingly, there are currently two types of property, which qualify as like-kind:

1. Property held for investment, and, or
   
   
2. Property held for a productive use in a trade or business.

Exchanges must be limited to one exchange and one replacement property (NO)

This is another exchanging myth. There are no provisions within either the Internal Revenue Code or the Treasury Regulations which restrict the amount of properties which can be involved in an exchange. Therefore, exchanging out of several properties into one replacement property or vice versa, relinquishing (selling) one property and acquiring several are perfectly acceptable strategies.

Parties to an Exchange

Assuming a delayed exchange scenario, there are three parties involved in a typical transaction.

Upon Phase One (the sale of your exchange or relinquished property), they are: the Taxpayer (also called the Exchangor), the Buyer, and the Intermediary (also called the facilitator)

Upon Phase Two (the purchase of your replacement property), they are:
the Taxpayer (also called the Exchangor), the Seller, and the Intermediary (also called the facilitator)

Basic Exchange Rules

Let us look at a basic concept, which applies to all exchanges. Utilize this concept to fully defer the capital gain taxes realized from the sale of a relinquished property:

1. The purchase price of the replacement property must be equal to or greater than the net sales price of the relinquished property, and
   
   
2. All equity received from the sale of the relinquished property must be used to acquire the replacement property.

To the extent that either of these rules is abridged, a tax liability will accrue to the Exchangor. If the replacement property purchase price is less, there will be tax. To the extent that not all equity is moved from the relinquished to the replacement property, there will be tax. This is not to say that the exchange will not qualify for these reasons; partial exchanges do in fact qualify for partial tax deferral. It simply means that the amount of any discrepancy will be taxed as boot, or non like-kind property.

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