DON'T MISS A NEW LISTING AGAIN!
FREE AUTOMATED EMAIL UPDATES
1. You must intend on entering into an exchange as opposed to a sale and re-investment. You must document your intent in your sales and escrow papers. You must use an Accommodator who is not an "affiliated party". You must acquire property through your Accommodator for the same price, or higher, than the property which you sold. You are allowed to deduct your customary costs of sale to determine the exact amount you need to spend.
2. The net cash which comes out of your escrow must all go to the Accommodator and must all be used to acquire the replacement property. If you take any cash, it is called "boot" and all boot is taxable.
3. Your new replacement property must have the same debt, or more debt, than the property you sold.
4. Any promissory notes you receive must also be in the name of the Accommodator for use in acquiring the replacement property or you will have taxable "boot". (It is sometimes difficult to get a seller to take your note so be careful on how you structure the repayment terms and interest rate.) You might be able to qualify for an "installment sale" for the note if you cannot pass it on to the owner of the replacement property. In installment sales you only pay tax as you receive the funds.
5. You must part with "qualified" real property and you must acquire "like kind" qualified real property. Stocks, bonds, securities, inventory, partnership interests and second homes do not qualify for any leg of an exchange. However, "like kind" investment property has been broadly defined so that you do not have to exchange a residential income property for another residential income property. You can exchange for commercial, industrial or even raw land as long as the property is to be held for investment, income or other productive use. It cannot be held for resale. Therefore, a subdivider/developer could not exchange his finished product since this is property held primarily for resale (stock in trade or inventory).
6. Once you close your escrow and the funds are delivered to the Accommodator, you have 45 days to "identify" replacement property, or properties, in writing and another 135 days to close (total 180 days - not 6 months, depending upon the calendar). You must check for weekends and holidays as the IRS does not allow you to exceed 180 days to close. Caveat - close early!
7. There are four options for identifying qualified replacement properties. You should check with your tax advisor/counsel to see which one best meets your needs.