Like Kind Exchange -Personal Use

Posted on by

Eleanor Breezy decided that rather than have an investment rental property in town, she’d get one at the beach so she could use it 14 days out of the year and have fun at the beach. After all she was at 32 still young, still beautiful and divorced without children. She got the rental property and her house in the divorce. She consulted her accountant about the tax impact of selling it. He told her that she was going to get hit pretty hard with taxes because her ex had depreciated down to nothing prior to giving it to her in the divorce. He suggested that there was something called a like kind exchange and that she should consult an attorney for the specifics. She went to see a real estate attorney, Geoffrey Dunder. Mr. Dunder agreed that a like kind exchange would work for her and that he could act as intermediary and paper the transaction. He went through the usual discussion of the identification rule of 45 days and the settlement rule of 180 days. She put her property on the market and started looking for her dream beach house. She immediately got a contract for the rental property from a nice couple with two kids and a dog. She was very happy that the house would have a good owner. The contract called for settlement in 30 days, she bumped it up to 60 days to give her time to find the replacement property. Geoffrey made sure that the appropriate language was in the contract to permit the like kind exchange.

She found a darling cottage in Ocean City, New Jersey. It was perfect. She could rent it out, and use it 14 days in May and in September and still get prime rental dollars. It had a new kitchen with all the energy efficient and high end appliances. She put a contract down and the price was workable with the other sale and the settlement date tracked so that it would occur shortly after the other contract settled. She smartly kept the sale of other property contingency in the contract in case something blew up. The old property settled and one week later she settled on the new property. The paperwork was flawless and she did not recognize any taxes on the transaction.

Reverse Like Kind Exchange

Posted on by

Keeping on the subject of like kind exchanges.
ody Burden found a great deal on an office building. But he needed to sell the office building he owned, but didn’t want to lose the new office building. Bidding was hot and heavy, so he knew if he had a long settlement date he’s lose the office building. He went to his lawyer to ask what he should do. The lawyer replied, “How about a reverse like kind exchange. In that situation, you get a bridge loan from a bank and buy the other property and park the old property with a qualified intermediary. So long as they report the transaction on their taxes, its great.”

The lawyer called Sundasky Intermediary Company and they set up a Corporation to handle the transaction. After procuring the bridge loan which was secured by both old and new property, the old property was deeded to Sundasky Old Property Corporation and at that time Jody identified New Property to Sundasky. The new property was acquired by Jody, the same day. Within 180 days, Old Property was sold to Perry Prospector and the loan was partially paid off from the proceeds and Old Property was released from the Mortgage. No money went to Jody. Jody and Sundasky Old Property Corporation filed and reported the transaction on their tax returns. No income tax was payable.

Success, sort of!

Posted on by

Cedric settled on the property, the money went to the qualified intermediary and 45 days later he found a great piece of vacant land to invest in. He settled pretty quickly, the intermediary wiring the money smoothly, and he deferred the taxes until he sells this land. He was thrilled. Feeling rich, he went by the Biker’s shop and bought a new Crotch Rocket. Two days later, he died in a a motorcycle accident. His family got to step up his basis in the property (as is allowed after a loved one dies) to the date of death value, and they quickly sold the land and paid no income taxes on the transaction.

The Plan

Posted on by

“Hi, I’m Cedric”. “I’m Ito Brassballs, what can I do for you?” “I’ve got this condo that I’m selling and I’m supposed to make about $475,000 in gains, and I heard that there’s something called a like kind exchange that can save me some taxes”, Cedric said matter of factly. “Is it an investment property?” the lawyer queried. “Yes”, Cedric answered. “Then, yes you can do an exchange for other real property. There are two types of like kind exchanges. A direct exchange which happens rarely these days because it so hard to match two people to swap property. The other is a deferred exchange in which you settle on the property, the money is placed in the hands of an intermediary and held in an escrow account. You have 45 days to identify replacement property and 180 days to settle on it, under the safe harbor under the regs”, Ito answered. “So let me get this straight, I settle on the property, go out and find new property, identify it to the Intermediary in 45 days, settle on it in 180 days?” Cedric repeated. “Yes”, there are a few other rules. The replacement property must not be purchased for personal use. You have to take on as much debt as you had on your previous property or recognize gain. In essence the purchase price has to exceed the purchase price of the property you’re surrendering”, as a rough rule of thumb. Also, if you get any cash you’ll owe tax on it. Your basis will only change slightly so you ae deferring the taxes not saving them. I can prepare an addendum to your sales contract”, Ito replied. “That would be great “ Cedric replied. After Ito told him all the fees involved, he prepared the addendum to the real estate sales contract.