Steps to a Delayed Exchange

Exchangor (that's you) enters into a contract to sell your Relinquished Property to a willing buyer.
Exchangor enters into an Exchange Agreement with a Qualified Intermediary.
At closing, Exchangor assigns his/her position as seller of the Relinquished Property to the Intermediary.
Qualified Intermediary closes on the Sale of the Relinquished Property and a direct deed is delivered by the Exchangor to the buyer. Sales proceeds are sent directly to a qualified escrow account.
Exchangor has 45 days from close on Sale to identify up to three Replacement Properties, and 180 days total to close on one or all of them. (See Identification of Replacement Properties below.)
Exchangor locates Replacement Property and enters into an agreement to purchase. (Exchangor can actually enter into the agreement to purchase at any time, even months prior to initiating the first steps of the exchange.)
At closing, Exchangor assigns his position as buyer of the Replacement Property to the Qualified Intermediary. A direct deed is delivered to Exchangor and sales proceeds are paid directly to seller of Relinquished Property.

DETAILS ON THE IDENTIFICATION OF REPLACEMENT PROPERTIES RULES:

EXCHANGE PERIOD: You must receive your Replacement Property within the Exchange Period. The Exchange Period runs for 180 days beginning with the date on which you transferred your Relinquished Property to your Buyer. NOTE: If your 180th day falls after the due date for your tax return for the taxable year in which you transferred your Relinquished Property, you must file for an extension of tax in order to enjoy your full 180 Exchange Period.
IDENTIFICATION PERIOD: The property you intend to use as your Replacement Property must be identified to the Qualified Intermediary, in writing, within 45 days of the close on your Relinquished Property. This 45 day rule is firm, and cannot be extended for any reason. The 45 day period includes Saturdays, Sundays, and legal holidays.
- MANNER OF IDENTIFICATION: You must identify your Replacement Property in writing to the Qualified Intermediary by midnight of your 45th day. Your identification must contain an unambiguous description of your Replacement Property including either a street address or a legal description.
- MULTIPLE PROPERTY RULES: You may choose to follow whichever rule below that is most appropriate for your situation:
REVOCATION OF IDENTIFIED PROPERTIES: You are permitted to make changes in the identified properties by revoking some identifications and substituting others during the 45-day identification period, as long as at the end of the period you satisfy the above limitations on the identified property.

WAREHOUSE (REVERSE) EXCHANGES:

In the usual exchange the Exchangor first conveys the Relinquished Property through the Intermediary to the buyer and subsequently receives the Replacement Property. Reverse exchanges have long been structured when the Exchangor needed to receive the Replacement Property before conveying the Relinquished Property. In Revenue Procedure 2000-37, effective September 15, 2000, the IRS finally acknowledged and accepted the two usual Reverse Exchange formats:

EXAMPLE A
Taxpayer loans cash to Intermediary, Intermediary uses the cash to purchase the Replacement Property from seller. Intermediary holds Replacement Property until Exchangor has a buyer ready to close on the Relinquished Property. Exchangor transfers the Relinquished Property through the Intermediary to the buyer and the Intermediary transfers the Replacement Property to the Exchangor. The loan to the Intermediary is repaid with the proceeds from the sale of the Relinquished Property.

EXAMPLE B
Taxpayer loans cash to Intermediary, Intermediary uses the cash to purchase the Replacement Property from Seller. Intermediary transfers the Replacement Property to the Exchangor and Exchangor transfers the Relinquished Property to the Intermediary. Intermediary holds Relinquished Property until Exchangor has a buyer ready to close on the Relinquished Property. Intermediary sells the Relinquished Property to the buyer and the loan is repaid with the proceeds from the sale.

Several requirements must be met to satisfy the IRS. The title-holding arrangement must be put into writing within 5 business days after title is transferred to Intermediary. The property to be relinquished must be identified within 45 days after title is transferred to Intermediary, and the sale must occur within 180 days. The Exchangor can provide all of the money and guarantees necessary to purchase the Replacement Property. The Exchangor can lease the property from Intermediary, can manage the property and can supervise improvements to the property. While Intermediary is on title to either the Relinquished Property or to the Replacement Property, Intermediary must report all of the income and deductions as the owner of the property.

IMPROVEMENT EXCHANGES:

Exchangors often wonder whether they can build on or make improvements to their Replacement Property to suit their needs. Fortunately this is possible, however if the Exchangor disposes of one property at one value and then replaces it with a property of a lesser value, there could be a large tax liability on the difference. The key to the reduction or elimination of this tax liability is to increase the value of the Replacement Property before the Exchangor receives it. To do so, the Intermediary purchases the Replacement Property, retains ownership, makes the improvements and then transfers the property to the Exchangor.

Standard Delayed Exchange time requirements are applicable to Improvement Exchanges, therefore the Exchangor must identify the Replacement Property within 45 days of closing on the Relinquished Property, and the improved Replacement Property must be transferred to the Exchangor within 180 days of the closing on the Relinquished Property. (All improvements need not be completed within the 180 days, however to prevent tax liability enough work should be completed in order to increase the value of the Replacement Property to roughly equal that of the Relinquished Property.)

Careful planning is required to effectuate the Improvement Exchange. Weather, building permits and numerous other unforeseen problems can lead to long delays which can negatively impact the timing of the Improvement Exchange. These types of potential hazards should be carefully evaluated before the Exchangor decides on the Improvement Exchange route.

Exchangors often wonder whether they can build on or make improvements to their Replacement Property to suit their needs. Fortunately this is possible, however if the Exchangor disposes of one property at one value and then replaces it with a property of a lesser value, there could be a large tax liability on the difference. The key to the reduction or elimination of this tax liability is to increase the value of the Replacement Property before the Exchangor receives it. To do so, the Intermediary purchases the Replacement Property, retains ownership, makes the improvements and then transfers the property to the Exchangor.

Standard Delayed Exchange time requirements are applicable to Improvement Exchanges, therefore the Exchangor must identify the Replacement Property within 45 days of closing on the Relinquished Property, and the improved Replacement Property must be transferred to the Exchangor within 180 days of the closing on the Relinquished Property. (All improvements need not be completed within the 180 days, however to prevent tax liability enough work should be completed in order to increase the value of the Replacement Property to roughly equal that of the Relinquished Property.)

Careful planning is required to effectuate the Improvement Exchange. Weather, building permits and numerous other unforeseen problems can lead to long delays which can negatively impact the timing of the Improvement Exchange. These types of potential hazards should be carefully evaluated before the Exchangor decides on the Improvement Exchange route.

OWNER FINANCING AND EXCHANGES:

There are basically three ways of structuring an exchange where the Exchangor finances all or part of a sale. As a starting point, if the Exchangor simply sells the Relinquished Property and takes back a note (or land contract) and receives payments, the payments will be subject to capital gains taxes on an installment basis and the Exchangor will defer taxes only on the amount of the downpayment. There are three things the Exchangor might consider in this situation:

The Exchangor could try to persuade the Seller of the intended Replacement Property to accept the note (land contract) as all or part of the consideration for the purchase of the Replacement Property.
The Exchangor can sell the note (land contract) on the open market.
The Exchangor can buy the note (land contract) and receive payments. The interest received would be treated as ordinary income.

The net result of any of the three alternatives is that all of the equity from the Relinquished Property is used for the purchase of the Replacement Property.

FACTS AND FICTIONS REGARDING EXCHANGES:

FICTION: My property really has not appreciated that much to incur any significant gain.
FACT: Depreciation on investment property reduces your basis and can lead to capital gains taxes on the difference between you adjusted basis and your sales price.
FICTION: I must have a property available to swap for.
FACT: You can sell to any willing purchaser and buy from any willing seller as long as you use the services of a Qualified Intermediary.
FICTION: The property I am exchanging into has to be exactly like the property I am selling.
FACT: Your sale and purchase properties must simply be investment or income producing property and need not be the same exact type of property.
FICTION: The Intermediary will take title to my property at some point in the exchange.
FACT: Through the use of Direct Deeding the deed goes from you to your buyer and from your seller directly to you.
FICTION: I can have my attorney or brother act as my Qualified Intermediary.
FACT: Your relative, tax or legal advisor, employee, and real estate agent are all related parties cannot function as your Qualified Intermediary.
FICTION: I will not be able to pay off my old mortgage or get a new mortgage if I do an exchange.
FACT: Your mortgage is paid off at closing and you can arrange for a new mortgage just like you normally would in a regular sale and purchase.

CONTRACT CLAUSES REFLECTING TAXPAYER'S INTENT TO COMPLETE TRANSACTION AS AN EXCHANGE

WHERE EXCHANGOR IS SELLING: Seller reserves the right to convert this transaction to an exchange pursuant to Internal Revenue Code section 1031. Buyer agrees to cooperate with Seller and shall execute an Assignment Agreement and any other documents reasonably requested by Seller at no additional cost or liability to Buyer.

WHERE EXCHANGOR IS BUYING: Buyer reserves the right to convert this transaction to an exchange pursuant to Internal Revenue Code section 1031. Seller agrees to cooperate with Buyer and shall execute an Assignment Agreement and any other documents reasonably requested by Buyer at no additional cost or liability to Seller.

SETTING UP YOUR EXCHANGE

Equity Exchange LLC will be happy to set up your exchange through your attorney's office or any title insurance, or real estate company you choose, even on short notice. Just be sure to call us before you close on any property, and be prepared to provide us with the following information.

EXCHANGOR NAME (PERSON OR ENTITY ON TITLE; THE TAXPAYER)
EXCHANGOR'S MAILING ADDRESS
EXCHANGOR'S PHONE (WORK AND HOME)
FULL ADDRESS OR LEGAL DESCRIPTION, INCLUDING THE COUNTY, OF EACH RELINQUISHED PROPERTY (PROPERTY BEING SOLD)
COMPLETE ADDRESS FOR TITLE COMPANY OR ATTORNEY'S OFFICE WHERE EACH CLOSING WILL TAKE PLACE
CLOSER'S FULL NAME
CLOSER'S PHONE
CLOSER'S FAX
CLOSER'S FILE NUMBER
DATE EACH CLOSING WILL TAKE PLACE
FULL ADDRESS OR LEGAL DESCRIPTION, INCLUDING THE COUNTY, OF EACH REPLACEMENT PROPERTY (PROPERTY BEING PURCHASED).