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

Exchanging can sometimes involve complicated legal and tax issues. And, the failure to comply with applicable Like-Kind Exchange Regulations can jeopardize the potential tax deferred status of your transaction. Therefore, when considering an exchange, seek out the counsel of a qualified legal, tax or exchanging professional. Advise them of the facts and circumstances of your proposed transaction and secure the services of a recognized and respected exchange facilitator.

What is a Tax Deferred Exchange

A tax-deferred exchange represents a simple, strategic method for selling one qualifying property and the subsequent acquisition of another qualifying property within a specific time frame.

Although the logistics of selling one property and buying another are virtually identical to any standard sale and purchase scenario, an exchange is different because the entire transaction is memorialized as an exchange and not a sale. And it is this distinction between exchanging and not simply selling and buying, which ultimately allows the taxpayer to qualify for deferred gain treatment. So essentially, sales are taxable and exchanges are not.

Internal Revenue Code, Section 1031

Because exchanging represents an IRS recognized approach to the deferral of capital gain taxes, it is important for us to appreciate the components and intent underlying such a tax deferred or tax free transaction. It is within Section 1031 of the Internal Revenue Code that we find the core essentials necessary for a successful exchange.

Additionally, it is within the Like-Kind Exchange Regulations, previously issued by The Department of the Treasury, that we find the specific interpretation of the IRS and the generally accepted standards and rules for completing a qualifying transaction. Throughout the remainder this booklet we will be identifying these rules and requirements, although it is important to note that the Regulations are not the law. They simply reflect the interpretation of the law (Section 1031) by the Internal Revenue Service.

Why Exchange?

Any property owner or investor who expects to acquire replacement property subsequent to the sale of his existing property should consider an exchange. To do otherwise would necessitate the payment of capital gain taxes in amounts which can exceed 20%-30%, depending on the appropriate combined federal and state tax rates. In other words, when purchasing replacement property without the benefit of an exchange, your buying power is dramatically reduced and represents only 70%-80% of what it did previously.

Misconceptions About Tax Deferred Exchanges

Before we continue by identifying the various types of exchange strategies and their associated rules, let’s identify four common exchange misconceptions.

All exchanges must involve the swapping or trading with other property owners (NO)

Before delayed exchanges were codified in 1984, all simultaneous exchange transactions required the actual swapping of deeds and simultaneous closing among all parties to an exchange. Oft times these exchanges were comprised of dozens of exchanging parties as well as numerous exchange properties. But today, there is no such requirement to swap your property with someone else in order to complete an exchange. The rules have been streamlined to the extent that the current process is reflective more of your qualifying intent rather than the logistics of the property closings.

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