Sec 1033 exchange

[appelman]

A client is working to complete a Sec 1033 exchange. When figuring whether all of the net sales price of the original property has been properly reinvested, do you include in the purchase price of the new property all the capitalizable closing costs, such as title insurance, escrow fees, transfer tax, etc?

[appelman]

A further wrinkle

What if the purchaser makes substantial improvements to the property within the two-year limit for the exchange. Can the cost of these count as part of the total that he must pay to defer all gain on the original sale?

[Burke]

I think the answers to your two questions are covered in material that I have, but it is much too long to reproduce here. It is from "Brief Exchanges," a publication from www.ipx1031.com which looks like it is downloadable from their website. I would suggest you get a copy if you are dealing with these. (Booklet is 56 pages).

1. Page 16 (of my edition) covers Closing Costs & the Tax Deferred Exchange. Also see Rev Ruling 72-456, and Treas Reg. 1.1031(k)-1(g)(6) regarding safe harbor restrictions.

2. Pages 20 - 26 (of my edition) deal with The Build-to-Suit Exchange which deals with construction or improvements to the replacement property. Nowhere can I find anything about a 2-yr rule. It appears to be the same 180-day period normally required of a like-kind exchange. See Rev Proc 2000-37.

I find this to be excellent resource material.

[appelman]

That's a great reference!

Thank you, Burke. It really refers to Sec. 1031 exchanges, but I think that much of the information is equally relevant to Sec. 1033 exchanges. In particular, it appears that the answer to my first question is "It depends," while the answer to my second is clearly "No!"

Incidentally, the 2-year period to which I was referring is the period allowed for completion of a 1033 exchange, starting at the end of the year in which gain is realized on the original property.