Like Kind Exchange - Cost of Transaction?

[Unregistered]

How much does it cost to do a like kind exchange? I have a client that is buying and selling houses and thought this might be an option for him but if the cost of having it done is too great, it wouldnt make sense.

Any thoughts or experiences?

Thanks in advance.

[Jesse]

Varies

You need to check around with various qualified intermediaries and you'll probably find the fee varies.

[abby]

actual cost is modest

The accomodator fee is often quite modest in our area - I've rarely seen one over $500, and seen them low as $250 - but in a multiple property exchange this would be a cost per property.

Based on your query, I did want to mention that if your client is a 'flipper' - buying, fixing up and selling - then an exchange would not be suitable - because inventory is not eligible for exchange and in that kind of business, the houses are considered inventory.

If he buys and holds, though, either for investment or rental purposes, then the exchange is often a very good option when he decides to sell. Considering commissions, title insurance and other closing costs, the exchange fee is truly small. The shocker to the client is often that the tax preparation fee can be substantially higher than he's used to, as accounting for an exchange can be quite time intensive, particularly when multiple properties are involved.

[OldJack]

Investment v. inventory property

Based on your query, I did want to mention that if your client is a 'flipper' - buying, fixing up and selling - then an exchange would not be suitable - because inventory is not eligible for exchange and in that kind of business, the houses are considered inventory.

If he buys and holds, though, either for investment or rental purposes, then the exchange is often a very good option when he decides to sell.

Inventory or investment? I agree with your statement, but in all my years I have yet to see what clearly defines one status from the other except intent of the owner. Simply repairing, improving, or fixing up for sale of investment property does not always mean inventory property in my humble opinion.

[jimmcg]

Inventory v Investment

Old Jack you are correct in saying that intent has a lot to do with it. Also seem to recall a Tax Court case or memo, believe it was Batok, December 1992 that emphasized that to be considered an inventory item and a trade or business v an investment it must be "regular and continuous." What regular and continuous means we could probably debate until next New Years.

[OldJack]

I agree and in this case the income was taxable (with expenses as Sch-A) but not subject to SE taxes. Here is an excerpt from the court case you quoted:

Generally, to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity, regularity, and the taxpayer's purpose must be for income or profit. A sporadic activity, hobby, or amusement does not qualify. Commissioner v. Groetzinger [87-1 USTC 9191], 480 U.S. 23, 35 (1987). The Supreme Court has further stated that whether a taxpayer is engaged in a trade or business is a question of fact. Higgins v. Commissioner [41-1 USTC 9233], 312 U.S. 212,217(1941).
We believe that petitioner's installation of windows for M. David Paul does not rise to the level of a trade or business. Petitioner's activity, although engaged in for profit, was neither continuous nor regular. Petitioner had never installed windows prior thereto nor at any time thereafter. Rather, petitioner's activity was a "one-time job". Sloan v. Commissioner [Dec. 44,879(M)], T.C. Memo. 1988-294. Accordingly, petitioners are not liable for self-employment tax on the compensation received from M. David Paul.

[jainen]

business versus investment

This case was not about business versus investment, but rather business versus miscellaneous income. Such a taxpayer is not subject to SE tax, does not get favorable capital gains rates, and his operating expenses are itemized deductions.

[Jesse]

Old Jack you are correct in saying that intent has a lot to do with it. Also seem to recall a Tax Court case or memo, believe it was Batok, December 1992 that emphasized that to be considered an inventory item and a trade or business v an investment it must be "regular and continuous." What regular and continuous means we could probably debate until next New Years.

In this case the question asks for a "client is buying and selling houses", sounds like it could very well be regular and continuous - at least more than once. Simply repairing, improving, or fixing up for sale of investment property does not always mean inventory property, but doing it repetatively can not be compared to installing windows for a month. If I recall correctly that case came about because the taxpayer had "created" a loss from his one time activity of window installation.

There are just a ton of variables that could be involved in the vague questions and I think Abby made a very good point.

[abby]

I agree

I absolutely agree intent is very important. I know that we have had clients who ocassionally will fix up a building and we have often given it investment property treatment and thus considered it eligible for exchange - after a discussion with the client about intent.

All the points are good ones, and need to come up whenever this discussion comes up, as there is much room for interpretation - for instance the question comes up aggain and again how long a property needs to be held before it is considered held for investment. There is no set time period in the code, so we come back to intent once again.

In this case, I just hoped to make sure that this question was being addressed, if need be, based on the way the original question was framed.

And by the by, Happy New Year everyone!

[Unregistered]

like-kind costs

here in S Fla companies charge approx 700 + - per exchange...probably not that expensive if the "deal" is substantial, not to mention cost of having to pay the tax instead of deferring it.

[Unregistered]

Intermediaries

Who typically provides these services and where do I find them? Is this a service I could provide?

[TaxGuru]

Finding an Exchange Facilitator

The Federation of Exchange Accommodators (FEA) has a locator feature on its website:

http://www.1031.org/

[Unregistered]

Thanks... TaxGuru

The Federation of Exchange Accommodators (FEA) has a locator feature on its website:

http://www.1031.org/

THANKS!!! I appreciate the assistance.