Robert Farnsworth

There are a number of different ways tax deferred exchanges can be structured. They may involve two, three or more parties, and they may be quite simple or very complex. Following are explanations of a few ways of structuring an exchange.
The purest form of an exchange is a swap or a two party exchange. In this rare example, the two parties merely transfer title to the other party. However, the properties are rarely of equal value requiring one of the parties to balance the equities, typically through cash. Most of the time one of the parties will incur some type of 'boot' in this type transaction, this will cause some tax consequences. This could also be known as a simultaneous exchange as no time passes between the sale and the buy.
As you can see, it would be very difficult to find a party with the property you require, and that will accept the property you are relinquishing. This may require you to find three or more parties that will accept each other's properties to complete a simultaneous exchange, making the process very complicated for everyone involved.
A delayed tax deferred exchange is an exchange in which the taxpayer transfers property in exchange for property to be identified and received at some future point. It is as easy as sell and buy! The taxpayer sells his property to a buyer for cash. The cash is held by the qualified intermediary until the replacement property is acquired. Then, the taxpayer buys the replacement property using the cash held in trust with the intermediary. Obviously, I have simplified the process for illustration purposes, but it really is this simple.
To illustrate:
Sale Buy
Deed Deed
Cash Cash
As you can see from the above example, the IRS section 1031 code allows for an easier, less expensive and smoother transaction. Be aware that there are many rules that I have not addressed. We will discuss them in future articles.
If you want to acquire a property that needs sprucing up or is less in value than the relinquished property, consider an improvement exchange. Using an intermediary as described above, you can use proceeds to complete capital improvements, thus increasing the value of the acquisition property. This can be tricky, requiring careful planning with your tax advisor, but can result in a successful exchange into an improved property.
Rules of thumb'. 1) Form a game plan with your tax consultant prior to engaging in an exchange. 2) Always trade across or up. Trading down always results in boot received. 3) Do not receive property that is not 'like kind'. Known as 'boot' (cash, mortgage relief, personal property, rent prorations etc.) 4) Do not over finance the replacement property. Financing should be limited to the amount necessary to close. 5) Use all the proceeds from the sale of the relinquished property. 6) Keep track of the exchange time frames. They are not negotiable with the I.R.S. 7) Remember the only major disadvantage is the reduced basis for depreciation in the replacement property. 8) Use a qualified intermediary and escrow account.
Remember to consult with your personal and independent legal/tax advisor and counsel prior to engaging in an exchange. If you have any questions or comments, please E- mail Robert Farnsworth at robert@proactv.com or call 1-801-272-7272.
Robert Farnsworth CRS, GRI, CSP is President of Proactive Investments Inc. and Associate Broker with Proactive Properties. He holds three professional designations as well as receiving the Superior Achievement Award and Honor Society Award from the Salt Lake Board of Realtors. Robert has been involved with the marketing and development of investment properties throughout the Western States for 15 years.