Like Kind Exchange

[GTS1101]

A client called today that had some investment property that they originally purchased for 228,000 and did 7,000 of improvements over the years. Their adjusted basis is 235,000. They recently sold the property for 390,000. They have 45 days to identify a property to exchange it for. I have never really done a like-kind exchange and needed some guidance. If they purchase another property for 390,000 then they have a deferred gain of 155,000? But what if they only purchase a new property for 300,000? The deferred gain is then 65,000? Do they have to pay tax on the 90,000 difference if they buy a house that is lesser value than what they sold the original property for? Anyone out there who has lots of experience in this area. I don't want to give them wrong advice.

Thank You!

GTS1101

[solomon]

A client called today that had some investment property that they originally purchased for 228,000 and did 7,000 of improvements over the years. Their adjusted basis is 235,000. They recently sold the property for 390,000. They have 45 days to identify a property to exchange it for. I have never really done a like-kind exchange and needed some guidance. If they purchase another property for 390,000 then they have a deferred gain of 155,000? But what if they only purchase a new property for 300,000? The deferred gain is then 65,000? Do they have to pay tax on the 90,000 difference if they buy a house that is lesser value than what they sold the original property for? Anyone out there who has lots of experience in this area. I don't want to give them wrong advice.

Thank You!

GTS1101

If a Qualified Intermediary was not used, it probably would not qualify as a LKE.

[jimmcg]

If they had receipt or constructive receipt of the proceeds of the sale you refer to then forget
any like kind exchange.

[Burke]

The above posters are correct. You cannot sell a property, then buy another one at a later (or earlier) date and have it qualify as a like-kind exchange -- unless you have it handled through a third-party Qualified Intermediary and that intermediary holds the funds in escrow while the specified requirements are met. If the taxpayer(s) received a check for the sale proceeds, or it was put into an account they can access, they can hang it up. It is a taxable gain and reportable on their tax return. Is this what happened? If the proper assignment of sales proceeds on the original, relinquished property were transferred to the QI, and then a lesser-value property is obtained, there will be cash "boot" of $90,000 (approx -- not taking into account expenses.)
This would involve the installment sale provisions of the tax code and the recognitiion of the cash boot gain would be into the next taxable year -- assuming the original property was sold in 2010.

[Roland Slugg]

Your "conclusions" in the original post are correct. If only $300k is reinvested, then $90 of the gain will be taxable, and the rest gets deferred.

However ...

The comments made by the folks who replied already are correct. If the sale proceeds did not go DIRECTLY to a QI, but were received by the sellers themselves, there can be no LKE. It doesn't work like an IRA where a taxpayer can take funds out of his IRA then roll it over into an IRA elsewhere within 60 days.

If your clients do qualify for and successfully complete a LKE, F-8824 will need to be attached to their return. Have fun completing that form ... it can be tricky.