Use of tax-deferred exchanges increases as a result of new 1031 Proposed Regs

Article Abstract:

Section 1031 Proposed Regulations have increased the safe harbors for tax-deferred like-kind exchanges. A tax deferred exchange is an exchange of real property by a taxpayer for property owned by another taxpayer and may be simultaneous or deferred. The Proposed Regulations have created a uniform terminology for tax-deferred exchanges. Taxpayers should consider business as well as tax factors when property has substantially appreciated in value. The disadvantages of tax-deferred exchanges are reduced basis in the replacement property from the carryover of the basis of the property being relinquished, increased transactional costs, and lack of liquidity. When money or property of not a like kind is received in an exchange, taxpayers will partially recognize gain. Four safe harbors created under the Proposed Regulations are security or guarantee arrangements, qualified escrow accounts or trusts, the use of related parties, and consideration of interest and growth factors.

Analysis, Real property tax, Real property taxes, Revenue

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Deferred like-kind exchanges in 20 easy steps

Article Abstract:

Like-kind exchanges enable taxpayers to change their business-property or investment-property holdings without incurring income tax responsibilities. With the implementation of DRA 1984, taxpayers could perform like-kind exchanges with the theoretical certainty that they would receive non-recognition treatment under Sec. 1031. However, Sec. 1031(a)(3) holds that replacement property obtained through an exchange is not qualified as like-kind property if it is not identified as property to be acquired in the exchange within 45 days of the transfer of property given up by the taxpayer and is received after the earlier of either 180 days after the taxpayer transferred the property given up or the due date for the tax return of the taxpayer for the tax year of the relinquishing of the property. Taxpayers can use the 20-step checklist issued by the IRS on like-kind exchange engagements.

Methods, Tax-free exchanges

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Safe harbors, ease of use, encourage deferred exchanges

Article Abstract:

Taxpayers need not realize any gain or loss from the exchange between two like properties used productively in business or trade or for investment according to Sec 1032(a). Final Regulations governing one form of such exchanges, the deferred like-kind exchange, has just been released by the IRS in 1991. These regulations offer safe harbors for deferred exchanges to resolve unsettled issues that have served to deter taxpayers and their advisor from entering into such transactions in the past. Furthermore, the final regulations provide guidelines on the use of escrow agents and accoumodators. Safe harbors for avoiding the constructive receipt of money or property for the relinquished property are available to security or guarantee arrangements, qualified intermediaries, qualified escrow accounts and trusts, and interest and growth factors.

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