Tips for the Advanced Investor

You are probably already aware of the great benefit of deferred exchanges; we hope to provide additional information that will assist you in planning for your financial security.

  • If you are looking to convert your large investment property into retirement income, you may want to consider exchanging it into several less valuable properties. This way you can maintain your equity, and sell off individual properties over a period of time to spread out your tax liability. You may also be carrying losses which can be claimed against the capital gain, or you may wait until you are in a lower tax bracket and reduce your tax liability.

  • Properties that are to be exchanged must be like in kind. This does not refer to the value of the property, but the use of the property. Most real property is considered like kind; for example, you may exchange a passive property (uncleared land) into income property (an apartment complex). This exchange may be performed regardless of the capital gains realized from the sale of the uncleared land.

  • It is important to note that the ownership of properties both before and after the exchange must be identical. If a husband or wife is not listed on the relinquished property, he or she may not be listed on the replacement property. The concept of identical ownership also applies to corporations, partnerships, and trusts that may be executing the exchange.

  • The party that you choose to act as an accomodator (qualified intermediary) in a deferred exchange must meet certain requirements (as defined by the Regulations) or they may be "disqualified." It is very important that the accomodator not be acting as an agent to the exchanger in any way. Technically, a person (or company) that has acted as the exchanger's agent within the previous two years will disqualify them as an intermediary.

    Examples of people who would not be qualified to act as an accomodator for the exchanger would include someone who has served as the exchanger's attorney, employee, accountant, real estate agent, or broker. Additionally, immediate family, and sometimes even distant relatives may be disqualified. Such care is taken because the exchange will become void if, at any time, the exchanger has access to the proceeds of the sale of the property that is being exchanged (in Step 1 of the exchange.)

  • One of the reasons you should hire a professional accomodator (like Title Exchange Company) is that they are more familiar with handling escrow accounts. It is possible for the escrow officer to unintentionally disqualify the exchange by giving the exchanger too much control. If the exchange is disqualified the exchanger will then be liable for the tax on the gains.

  • As an exchanger you have the ability to select up to three properties as prospective replacements. You will have the flexibility to include all three properties in the exchange, but at least one must be acquired. You also have the ability to add and remove properties from the list during the 45 day identification period.

  • When you are selecting a replacement property the value of the replacement may not be greater than 200% of the value of the property being exchanged. This does not limit the number of properties that are being exchanged, but only the total combined fair market value of the properties you are exchanging for.