Under the following
circumstances a Taxpayer (seller) of a business
(income-producing property) or investment held property has the
ability to Pay No Capital Gains Tax when disposing of
their property. This is possible through what's called a
Real Estate Exchange, through Section "1031" of the
Internal Revenue Code.
One of the requirements in order to
receive this favorable tax savings is that you dispose of a
Relinquished Property and acquire a Replacement Property
all within a 180 day period known as the "ExchangePeriod".
With the recent "Reverse Revenue
Procedure #2000-37", our government has created the
opportunity for a
Taxpayer looking to take advantage of the "Best
Kept Secret In Real Estate" and receive an additional
180 days to complete their transaction under certain
conditions.
Example: The taxpayer wants
to achieve a "Reverse Exchange" which means that the
Replacement Property is acquired before the taxpayer disposes of
the Relinquished Property. An
"ExchangeAccommodation Titleholder" is brought into
the transaction to acquire legal title of the Replacement
Property in order for the transaction to be structured properly
as a "Reverse Exchange". In this type of an
Exchangethere is the need for an "ExchangeAccommodation
Titleholder" to acquire legal title of the Replacement
Property and as with a normal Deferred Exchangethere is also a
need for a "Qualified Intermediary". The services of
both of these professionals are needed to accomplish a Reverse
Exchange.
Once the ExchangeAccommodation
Titleholder goes into legal title for the Replacement Property,
the Taxpayer (seller) now has 180 days to dispose of the
Relinquished Property. Keep in mind that the Taxpayer can
never have legal title to both the Relinquished Property and
Replacement Property at the same time. The Taxpayer must
identify the Relinquished Property being disposed of, within
forty-five (45) days for the Reverse Exchangeto qualify for I.R.S. purposes.
Let's assume in our example that
the Replacement Property acquired had a value of $100,000.00
(mortgage-free) and that the Relinquished Property that was
disposed of within the required one hundred and eighty days was
disposed for $250,000.00 (mortgage-free). The Taxpayer has
an additional one hundred and eighty more days from that point
when legal title was conveyed on the Relinquished Property which
completed the Reverse Exchangeto acquire another Replacement
Property or Properties to achieve a plain vanilla "Deferred
Exchange". Also, the Taxpayer needs to acquire other
Replacement Property of at least one hundred and fifty thousand
in order not to have any tax liability.
The Wake-Up item here is that the Taxpayer
acquired a Replacement Property before disposing of a
Relinquished Property through the use of an ExchangeAccommodation Titleholder as well as the use of a Qualified
Intermediary. Within that one hundred and eighty day period
disposed of the Relinquished Property and in our example
used the balance of proceeds from the Relinquished Property
to acquire other Replacement Property or Properties and was
given a new one hundred and eighty day clock from that point
to achieve what's called a Deferred Exchange. It is
important to understand that the Taxpayer must be in a
financial position to fund the purchase of the Replacement
Property, because they don't have the proceeds from the
disposition of the Relinquished Property yet.
To recap a safe harbor reverse
Exchangecan be combined with a deferred Exchangeand an
additional one hundred eighty day period can be utilized to
accomplish this type of Exchangetransaction. As in any
type of an Exchangetransaction always consult with a
professional qualified intermediary before proceeding.