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New Construction in Exchange
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A SAMPLE OF ONE TYPE OF DEFERRED EXCHANGE: STEP BY STEP
Exchangor enters into contract to sell old
property to Buyer.
Real estate broker refers Exchangor to a tax
attorney.
Exchangor enters into exchange agreement with
Intermediary.
Intermediary agrees to take old property and
sell it to acquire funds to buy new property for Exchangor.
Exchangor assigns
to Intermediary his rights to sell old property
and all his other rights under contract.
Exchangor gives notice of the assignment to
Buyer.
Intermediary instructs closing agent and Buyer
that Exchangor will deed directly to Buyer in order to avoid duplication of documentary
stamps. Intermediary executes closing statement showing proceeds to himself and
Intermediary receives all the net proceeds. Intermediary, as required by the exchange
agreement, allows Seller no possession or control over the proceeds.
Buyer locates up
to 3 potential replacement properties and designates them in a signed writing delivered to Intermediary within 45
days of the closing of the sale of the old property. In
buying replacement properties, Intermediary must use all the cash
proceeds from the relinquished property and buy replacement properties with
an aggregate purchase price equal to the selling price of the relinquished
property if the Exchangor is to defer all capital gain.
Exchangor signs a contract to purchase the new
property and places a deposit on the contract.
Exchangor assigns the contract to purchase and
the rights in the deposit to Intermediary. Intermediary can
reimburse the deposit to Exchangor upon assignment.
Exchangor gives notice of the assignment to
Seller.
Intermediary instructs Seller and closing agent
to have the deed pass title directly into Exchangor in order to avoid duplication of
documentary stamps.
Intermediary closes the contract to purchase by
delivering the proceeds from his sale of the old property directly to the closing agent in
exchange for the deed into Exchangor. Title must pass into Exchangor within 180 days of
the closing of the sale of the old property. Intermediary signs the closing statement.
Any
additional funds necessary to close the purchase of the new property can come from the
Exchangor.
This is a sample of one pattern used by some attorneys.
Perhaps all would not agree that this example, even if carefully documented, would qualify
as a valid deferred exchange meeting the requirements of Section 1031 of the Internal
Revenue Code. In any event, the details of the documents must be added and the
events must be carefully monitored in order to qualify. This pattern is shown for
general information and discussion purposes only. Details have been omitted in order
to demonstrate the pattern. No one should attempt to structure or document a tax
deferred exchange without the guidance of a tax attorney. See Section
1031 Exchanges.
Examples of complicating factors: Construction on the
new property not completed within the 180 days. Changes in the intended use after
acquisition of the new property. Substantial personal use of the old
property. Mortgage financing of the new property for additional funds to acquire the
new property. Refusals and inadvertent failures of other parties to the transactions
to cooperate. Personal property included in the sale. Contracting to purchase
the new property before a buyer is found for the old property.
This article contributed by Richard W. Winesett -
Fort Myers, Florida
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