Frequently Asked Questions
General
No, multiple properties can be sold and or purchased during the exchange as long as timing and identification rules are followed.
No. While there have been exemptions applied on a per case basis in the past, due to natural disasters, the rules and case law are clear that these dates must absolutely be followed to keep from voiding the exchange.
If you’re under contract but haven’t closed on the property, then you are still eligible to participate in an exchange. If you’ve closed on the property and received the money from the sale, your exchange opportunity is void.
Boot is the term used to identify funds received by the exchanger that are not reinvested into a replacement property. These funds are taxable to the exchanger.
Mortgage boot occurs in the situation where the exchanger has a loan on the relinquished property and does not take an equal to or greater loan amount on the replacement property. That differential is taxable unless it is replaced with out-of-pocket funds.
Financial
Yes, the amount must be identified prior to commencing your exchange. You can then receive the funds at closing, otherwise funds will need to be held by the Intermediary until the 181st day.
You need to replace the mortgage or pay it off with out-of-pocket funds to avoid mortgage boot and a taxable event.
Capital gains is calculated on your taxable gain not your equity. You can determine in four steps. 1) Determine your basis. This is generally the purchase price plus any commissions or fees paid. 2) Determine your realized amount. This is the sale price minus any commissions or fees paid. 3) Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference. 4) If you sold your assets for more than you paid, you have a capital gain.
You must file taxes for the tax year in which the exchange commenced using IRS form 8824. That date is identified as the day when you sold the first property (or purchased the first property in the case of a reverse exchange). NOTE: you may need to file an extension if you have not completed your exchange by the IRS filing deadline applicable to you or your entity.
No, but if you want to maximize the tax deferred value of your exchange you need to purchase a property that is greater than or equal to the property(ies) you relinquish.
Legal
Handling of any interest possibly earned on escrow funds will be addressed in the exchange agreement between the QI and exchanger.
Great, depending on the current real estate market, having your replacement property(ies) identified (and possibly under contract) early increases your chances of closing your replacement property before the 180 day exchange limit.
We typically advise our clients against it. There are many possible pitfalls that could invalidate the exchange that make exchanging with a related party risky including but not limited to intent and holding period.
No, but the clock starts on the date of the first property closing and all closings must complete within 180 days.
Property Rules
The short answer is no unless you own a property under a tenants-in-common contract in which case you can buy out other tenants to increase your ownership percentage.
Yes, however you need to perform an improvement exchange that requires identification of the improvements you intend to make on the property before commencing the exchange. The property is then purchased by the Qualified Intermediary and placed into an LLC which holds title until improvements are completed. All of which must be finished by the 180 day exchange date.
Only items that fall into the accounting classifications of Repairs or Capital Improvements can be identified as improvements.