New IRS Summary Publication on Tax-Deferred Exchanges

Recently, the Internal Revenue Service put out a nice little summary of Section 1031 like-kind, tax-deferred exchanges. “FS-2008-18” (FS = Fact Sheet) does a great job of summarizing the requirements, pitfalls, and advantages of like-kind exchanges.

The article starts off by observing that generally the seller of business or investment property is liable for tax on any gain, but Section 1031 allows for an exception for those who perform a tax-deferred exchange. Further, exchanges can result in full or partial tax deferral, depending upon whether cash, relief from debt, or non-like-kind property was received in the transaction.

The article is presented in a FAQs format, answering questions such as, “Who qualifies for the Section 1031 exchange?” (Answer: Owners of investment and business property, who can be individuals, C-corps, S-corps, partnerships [general or limited], LLC’s, trusts, or any other taxpaying entity.) Also commented on is who doesn't qualify for a Section 1031 tax-deferred like-kind exchange?

The different exchange structures (simultaneous, delayed [referred to as ‘deferred’ in the publication], and reverse) are briefly explained. Also, qualifying properties are described, including the requirement that properties be of “like-kind.” A list of excluded types of properties is included (such as stocks, partnership interests, etc.).

The next question deals with the timing requirements for completing a Section 1031 tax-deferred like-kind exchange. The 45-day Identification Period and the 180-day Closing Period are briefly addressed. Other restrictions, such as who can function as a qualified intermediary, are discussed as well. A caveat to be careful in your selection of a qualified intermediary is included.

The article wraps up with a discussion of how to calculate the basis in the new property, how to report the exchange to the IRS, and the long-term impacts of exchanging. The last paragraph is another caveat to beware of individuals who promote the improper use of Section 1031 tax-deferred exchanges; for instance, the encouragement to exchange vacation or second homes that do not qualify for an exchange. (The IRS released Rev. Proc. 2008-16, published today, that sets forth specific guidelines on the exchange of vacation homes. Rev. Proc. 2008-16 makes it much clearer what can be done to qualify your property as worthy of an exchange. That procedure should be reviewed thoroughly if you are going to attempt to exchange a vacation home.)

In short, this Fact Sheet is a nice summary of exchanging as it exists in the United States today. It’s a quick read and could be of help to you in learning about Section 1031 tax-deferred like-kind exchanges. You can read it in its entirety here.

March 13, 2008 update: I now have this IRS update available in MS Word format. If you would like your own copy, please get in touch with me and I will be happy to forward it to you.

Ken Tharp

Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.

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Copyright © 2008 By Ken Tharp, All Rights Reserved. * New IRS Summary Publication on Tax-Deferred Exchanges * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.