NOTE: If the sale of the relinquished property closes after October 15, you may have less than 180 days to close on the replacement property because you must close before filing your tax return on April 15 (unless a tax extension is filed).
HOW DO I IDENTIFY THE REPLACEMENT PROPERTY?
Sign and fill out the identification form included in your Phase I documents, have your signature notarized and send it to the intermediary by the 45th day.
NOTE: It is advisable to designate more than one replacement property in case your first choice falls through or is delayed beyond the required closing period. However, your designation should state “in the alternative” or “and/or”.
You may and should identify more than one replacement property. You can identify up to three properties regardless of value. You can identify more than three properties as long as the identified properties do not exceed 200% of the value of the relinquished property. If they do exceed 200% then you must acquire 95% of the identified properties.
If you intend to acquire less than 100% ownership in the replacement property, that fact must be included in the designation.
TITLE TO THE REPLACEMENT PROPERTY:
Title to the replacement property must be in the name of the same taxpayer as title, to the relinquished property. Please be aware of this requirement if you intend to set up a limited liability company or other entity to own or control the replacement property. A single-member LLC, which is a disregarded entity for tax purposes, may be permissible as long as the same taxpayer ID number (or SSN) is on both ends of the transaction.
NOTE: If a multiple-member LLC owns the relinquished property, the LLC is the entity that must do the exchange. Individual members cannot do an exchange with their interests in the LLC.
IS INTEREST EARNED ON EXCHANGE FUNDS?
Your exchange funds will be placed in a non-interest-bearing account unless you direct the intermediary to do otherwise, in which case additional charges may apply. Interest on exchange funds is taxable as ordinary income even if used to acquire the replacement property.
CAN I RECEIVE ANY FUNDS FROM SALE OF THE RELINQUISHED PROPERTY?
No. If you receive any funds prior to the 180-day closing period, it may disqualify the entire exchange. If you receive any funds at or after closing on the replacement property, even if used for repairs or improvements on the replacement property, it will be taxable as “boot.” There are some ways to resolve this issue if it arises.
HOW IS THE EXCHANGE DOCUMENTED ON MY TAX RETURN?
A form 8824 needs to be filed with your tax return.
OTHER TAX ISSUES: If you, as the seller of the relinquished property, finance the acquisition for the buyer, or if there are installment sale obligations owed to you, the funds you receive may taxable as “boot”. Any depreciation previously taken on the relinquished property will also be taxable as ordinary income. Please consult your tax advisor on these issues.