Exchanging for a Desirable But Unavailable Property

A “deferred exchange” means nothing more then disposing of a relinquished prop­erty and using the proceeds to acquire the replacement property through the use of a “professional qualified intermediary”.

The biggest problem most people have contemplating structuring a deferred ex­change: what to go back into in the way of a replacement property. Most owners who have reached a diminishing rate of return and realize that they need to dispose of their investment-held property and reinvest to maximize their rate of return, will agree that the right thing to do when reviewing their transaction alternatives is to treat their disposition as an exchange rather than a sale or installment sale.

A deferred exchange will allow the seller (taxpayer) an opportunity to reinvest 100 percent of their equity without paying state or federal income tax associated with their gain today. This tax-deferment is indefinite. Most people will agree that they would choose exchanging over any other method of disposition if they knew what they were going to go back into in the way of like-kind property.

That problem was addressed in 1984 when our tax code was amended to allow sellers/taxpayers to perform what was called a delayed exchange. This means that as long as your transaction is set up as an exchange prior to closing on the relinquished property through a profes­sional qualified intermediary, the taxpayer has forty-five days to identify (known as the identification period) the replacement property and one hundred and eighty days (known as the exchange period) to take legal title. The forty-five days is part of the one hundred and eighty day period.

So, now that we can perform an exchange without having to have the relinquished property and replacement property close on the same day, let’s talk about being able to acquire a better property than we currently own. Any person who owns in­vestment property must realize that they are not maximizing their rate of return by holding their investment property forever. But they have a pulse on their current property. They know what all the physical problems are, and understand their tenant profile and feel that they would just inherit new problems in probably an older building because of a lack of new construction in most markets.

This problem has also been addressed in the Exchange Regulations. What we call a “build-to-suit” exchange.

Read more...