Delayed Exchange — We’re talking tax deferred exchange here. You know, section 1031 and all that. Delayed is the key word there, as until the ’80′s exchanges were required to close simultaneously with all properties involved. In other words, you sold your current property, found your new property(s), arranged financing etc., then closed all of them the same day.
Yeah, I know — It was my life for several years, and there’s not a day I don’t thank the Lord for the Starker family. They’re the ones who defeated the IRS in the now famous 1979 decision. It’s directly because of their courage and fortitude we have the delayed exchange luxury today.
In short, the court decided the spirit of the exchange rules was not broken just because everything didn’t close on the same day. Imagine that — a sensible ruling.
Boot The investor must not take any cash from the exchange, as the IRS will call that cash (or anything else of value generated by the sale of the investor’s ‘relinquished’ property.) boot. It’s something of value, almost always cash, exited from the exchange to the taxpayer attempting to qualify for the exchange. That ‘boot’ will be taxed, and a half. Just understand the investor is exchanging their equity from one place to another, and the cash or cash equivalents should not darken his personal door. Also be aware, there are several ways to be ‘found guilty’ of taking boot in an exchange. I won’t list them all here, but instead give one example.
If the debt on the property you acquire is less than the property you’ve relinquished — it will be called debt relief — boot by the IRS, and you’ll be taxed on that amount. Tricky little devils, aren’t they? There are many more ways to find yourself with boot — and many can literally happen by accident. Tax deferred exchanges aren’t for the uninitiated.
There are those who try being cute by refinancing their properties for some extra cash before entering into an exchange. Technically this should be fine — but it’s absolutely not. Though I’ve never seen it enforced first hand, the IRS frowns on this big time. They’ll say the investor pulled the cash out — here it comes — ‘in anticipation of the intended tax deferred exchange.’ All that cash will be called part of the exchange, and therefore ‘boot’ ‘cuz you put it in your very own little bank account. Game, set, match, IRS.
BawldGuy Axiom: Don’t play with the folks who make the rules.
Relinquished Property That’s the property you’re selling so you can take the equity and acquire more property. It’s where everything begins in an exchange.
Time Limits You have 45 days from the day your ‘relinquished’ property deed records, to Identify your next property(s). It’s technically the earliest of the recording or when possession is given to the new owner. In my experience, (2-300 exchanges) 99.9% of the time it’s the deed’s recordation date.
The exchange must be completed 180 days from the same date — the deed’s recordation of the relinquished property. Don’t think holidays will add time either. Even days like Thanksgiving, Christmas, or New Year’s won’t add a day to your alloted 180. Believe it, as they have no sense of humor whatsoever. Oh, and if one of the properties you ID is burned down, floated away via flood, or ravaged by hurricane, and your 45 day ID period has passed? You won’t be allowed to ID new property. And who said life was fair? Wow.
There’s a glitch for some that can cause some real anxiety when it comes to the completion requirement of 180 days. If you close the front end of your exchange on say March 19, 2008 — your 180 days are up on April 15, 2008 — the date the taxpayers tax return is due. What!!!? That’s not even 30 days. Yep — but don’t panic, there’s a loophole. The key phrase would be ‘including extensions’.
“…the date the Exchanger’s tax return is due, including extensions, for the taxable year in which the relinquished property is transferred.”
These are randomly selected exchange terms. There are many more we can talk about another time. The idea I’d like you to really understand here is this: Tax deferred exchanges are indeed a very nice wealth building tool. That said, it’s also not as simple as most folks would have you believe. Don’t get me wrong, I’m not claiming rocket science status here. But it ain’t tinker toys either.
Doing things with a Purposeful Plan takes many of the surprises, (though never all of them) out of the equation. You don’t wanna be surprised during an exchange if you can avoid it. When yer dealin’ with folks who don’t make allowances for Thanksgiving and show no mercy for property lost in a hurricane, you wanna know what yer doin’.
Tax deferred exchanges aren’t for sissies.