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Maneuvering property-swap tax details

George SaenzDear Tax Talk,
I have several questions regarding property exchanges and taxes.

1. Do I have to use up all my capital gains in a 1031 exchange or can I take out some cash and pay tax on that much while I leave the rest for 1031 exchange?
2. Which firms hold the cash within the 180 days to reinvest? Any ideas where to get a list of some of these firms?
3. Do I pay anything to have this money held back for me for that period of time?

Thanks for your help. Cheers! -- Sola

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Dear Sola,
A Section 1031 exchange allows you to defer gain on the sale of an investment property into another property of a like kind. The deferral allows you to avoid paying tax while presumably trading for something more desirable. It's one of the few great tax shelters available.

Since it's difficult to find someone willing to trade properties, most exchanges are accomplished through an intermediary. The intermediary receives the sales proceeds of the property you dispose of and uses those funds to acquire the replacement property you identify.

While you may be able to keep some money out from the exchange by paying tax on it, the timing of when you get that money is controlled by limitations on the intermediary. Generally, when you enter into the Section 1031 exchange you have to commit all the net proceeds from the sale to the exchange, which means the money from the closing goes to the intermediary. Regs. Sec 1.1031(k)-1(g)(4)(i) provides that it is not possible to receive money upfront from the escrow intermediary while still qualifying for exchange treatment. That means the intermediary is required to impose limitations on your access to the funds.

Generally, you can get your money after 45 days if you don't identify a replacement property. If you identify a replacement property but can't or don't close, you usually have to wait the 180 days to get your money out of the intermediary. If you identify a property for less than all the money than is in escrow (i.e. so you can keep some money out) you'll have to wait the 180 days or until you close to get the overage back.

A qualified intermediary can't be someone related to you and it can't be your attorney, accountant or broker. Your real estate attorney will usually have a few companies to choose from to accomplish the exchange. Of course, all good things cost money and you can expect to pay between $500 and $1,000 for the service.


-- Posted: Dec. 23, 2004




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