You can still defer taxable income in a like-kind exchange when there is a delay in receiving the replacement property. By carefully timing the transactions to meet the like-kind exchange requirements, you may be able to defer taxes on all or part of the realized gain from the exchanged property. In some cases, a “reverse” deferred exchange can be arranged if you wish to acquire a specific property but have not yet identified the property to exchange.
A deferred exchange is useful when you have a buyer for your property but have not yet found the property to receive in exchange, or when you have identified the property you want but haven’t yet found something the other party is willing to accept. You might also need to delay the decision on what replacement property to accept.
To qualify for a deferred (non-simultaneous) exchange under the like-kind exchange rules, you must meet the following time limits:
1. Identify the replacement property within 45 days after transferring the relinquished property. The identification must be in writing and provide a detailed description of the property. You can identify up to three alternative properties or any number of properties if their total fair market value does not exceed 200% of the fair market value of all relinquished properties.
2. Complete the transfer of the replacement property within the earlier of:
a. 180 days after transferring the relinquished property, or
b. The due date (including extensions) for your tax return for the year in which you relinquished the property.
Be cautious with the second requirement. If you transfer the relinquished property late in the year, you might not have a full 180 days to receive the replacement property. For example, if you transfer on December 10th and do not extend your tax return deadline, you must receive the replacement property by April 15th, not 180 days later. An extension for filing your tax return provides additional time, but not for the 45- or 180-day periods.
If these time limits are too restrictive, consider alternative arrangements:
*Leasing your property to the other party temporarily.
*Granting an option to buy your property, exercisable when the replacement property is available.
*Transferring your property to an independent trust or escrow arrangement until the exchange can be completed.
Another option is the Qualified Exchange Accommodation Arrangement (QEAA), a safe harbor recognized by the IRS. By following IRS rules exactly, you can have the replacement property transferred to an accommodation party until you identify the relinquished property. This arrangement requires you to identify the property to be exchanged within 45 days of the replacement property being transferred to the accommodation party.
If the exchange involves related parties, special restrictions apply. Related parties include immediate family members and entities where you own more than a 50% interest. If either the relinquished or replacement property is sold within two years of the exchange, nonrecognition treatment will be lost. For example, if Max exchanges his property Whiteacre with his brother Tim for Tim’s property Blackacre, and Tim sells Whiteacre within two years, Max would lose the nonrecognition benefit and must report the gain in the year Tim sells Whiteacre. However, if Tim holds onto Whiteacre for two years, Max retains the nonrecognition benefit.
Lastly, if you conduct a like-kind exchange with a related party, you must file Form 8824 with the IRS for the year of the exchange and the following two years to keep the IRS informed.
Disclaimer: The information provided here is for general informational purposes only and should not be construed as legal or financial advice. Always consult with a qualified tax professional or advisor to discuss your specific situation and obtain advice tailored to your individual needs. The accuracy, completeness, and timeliness of the information cannot be guaranteed, and you should rely on professional guidance when making tax-related decisions.
