Q What IRS form is used to report exchanges?
A Form #8824, available for download at the IRS website.
Q Is it necessary for the taxpayer to obtain an extension if he has not completed the exchange by April 15?
A Yes. Filing the return prior to completing the exchange will occasion the gain to be taxable and not deferred.
Q May the taxpayer fully defer all gain realized on the sale of the relinquished property?
A Yes. However, the taxpayer must exchange "like-kind" properties of equivalent values. If a taxpayer exchanges a property for other like-kind property plus cash [or other non-like-kind property], the taxpayer recognizes gain to the extent of the lesser of the "boot" that the taxpayer received or the realized gain.
Q May the taxpayer receive monies from the closing of the relinquished property without invalidating the deferred exchanged?
A Yes. The taxpayer may receive money or other property (which will be considered boot and taxed) directly from the party to the exchange but not from the qualified intermediary.
Q May the taxpayer receive monies from the escrow or trust account prior to the completion of the exchange?
A No. A qualifying deferred exchange agreement must provide that the taxpayer does not have the right to receive boot prior to the conclusion of the exchange. Such premature receipt of monies or boot would be fatal to the deferral of the tax.
Q May the taxpayer be reimbursed from the escrow or trust account for earnest money or deposit paid on a contract for the replacement property?
A No. The intermediary should be the party to the contract for the purchase of the replacement property and should make disbursement directly to the seller of the replacement property.
Q If the 45 day identification period has expired without the taxpayer identifying any replacement property, may the taxpayer receive his monies from escrow without waiting until the end of the 180 day period?
A Yes. If the taxpayer allows the 45 day identification period to expire without identifying a replacement property, the gain is taxable and the exchange agreement is terminated.
Q If the taxpayer has acquired all the designated replacement property and the 180 day period has not expired, may the taxpayer take the balance in the qualified exchange account without jeopardizing the deferred exchange?
A Yes. However, the balance in the exchange account will be boot and taxed.
Q May the taxpayer exchange his personal residence for investment real estate and defer taxes?
A No. Section 1031 exchanges allow the deferral of taxes only on investment real estate not a personal residence. This transaction would be treated as a sale of the residence and the gain taxed. Section 1034 would allow the taxpayer to purchase another residence within 2 years and defer the gain but not investment real estate.
Q May the taxpayer exchange investment real estate for a personal residence and defer taxes?
A No. The personal residence is not "like-kind" to the investment real estate.
Q May the taxpayer designate foreign real estate as the replacement property in the exchange?
A No. Foreign real estate is not allowed as replacement property in a tax deferred exchange.
Q May an interest in a partnership be the subject of a tax deferred exchange?
A No. the regulations specifically prohibit partnership interests from tax deferred exchanges. Neither may stocks or bonds or other securities be the subject of tax deferred exchanges. The partnership may exchange property or the partnership may liquidate and its partners exchange undivided interests in property.
Q May an undivided interest in real estate be the subject of a tax deferred exchange?
A Yes. An undivided interest in real estate is "like kind" to real estate.
Q Do Saturdays, Sundays, and holidays extend the 45 day identification and 180 day replacement periods?
Q May the taxpayer identify more than one replacement property during the 45 day identification period?
A Yes. The taxpayer may identify 3 alternative replacement properties or more than 3 provided the aggregate fair market value of the properties identified does not exceed 200% of the value of the relinquished property.
Q May the taxpayer revoke an identification of a replacement property during the 45 day identification period?
A Yes. The revocation must be done prior to the expiration of the 45 day period and the substitute replacement property must be designated within that time period.
Q May the taxpayer combine the benefits of an installment sale with those of a deferred exchange?
A Yes. The replacement property would include a promissory note which would be taxed as an installment sale in the years in which the note is collected.