Frequently Asked Questions
What does not qualify for exchange?
Should I sell or exchange?
There are many ways to build an estate. One avenue is through investing in real estate. Careful consideration is given in selecting apartments, land, warehouses, or other types of investment properties. Likewise, the same consideration should be given when moving to another investment property. Unfortunately many do not take advantage of another method left to them: The tax deferred exchange!
The tax-deferred exchange allows the investor to defer paying capital gains tax on their investment properties. Conversely, an investment property that is sold without a tax-deferred exchange can force the seller to pay up to 33% of their gain in taxes! If an investor is looking to purchase other investment properties, then an exchange makes much more sense, because there is now a larger amount of money available to purchase the replacement properties. An investor is able to use the money they would have paid in taxes, and put it to work for them in another investment property.
What qualifies for exchange?
Any property held for productive use in a trade or business or for investment can be exchanged for like-kind property. "Like kind" refers to the nature of the investment. Any type of investment property can be exchanged for another type of investment property. For example: A single-family rental can be exchanged for a duplex. Raw land can be traded for a shopping center or an office for apartments. Any combination will work. This gives the Exchangor flexibility to change investment strategies to fulfill their needs.
What does not qualify for exchange?
A personal residence, stock in trade (developed lots), property held for resale immediately after acquisition or completion of improvements (speculation homes or fixer type properties that are not rented out or held on for a period of time before being sold), and partnership interests. Second homes may or may not qualify depending on the use and tax.
What is the "Boot Test"?
The "Boot Test" is a device to determine if there is a potential for taxable "boot" in a transaction. It is not a substitute for tax counsel, but it can be a thumb nail analysis to allow one to know if an exchange will be fully or partially tax deferred. The test is done to verify that the Exchangor is moving up and across in value, equity, and mortgage.
The example above is a fully tax deferred exchange. The equity has been moved across into the next property and there is a mortgage of equal or greater value to the mortgage on the Relinquished Property.
In the transaction above there would be some taxable boot. All the equity is not used in acquiring another like-kind property. Whatever the Exchangor put in his pocket would be taxable as boot (in this case it appears to be $50,000).
In the transaction above there would be some taxable boot. A property of lesser value is purchased, and there is a new mortgage of lesser value than the mortgage on the Relinquished Property. The difference between the two mortgages is classified as "mortgage relief," and is taxable as boot (in this transaction it appears to be $25,000). The only way to offset "mortgage relief" in a transaction is to add sufficient cash to offset the difference in mortgages.
What is a Reverse Exchange?
Acquisition of the Replacement Property before the Relinquished Property is sold. Please call us to review the process.