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Like Kind Exchange -Personal Use

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Eleanor Breezy decided that rather than have an investment rental property in town, she’d get one at the beach so she could use it 14 days out of the year and have fun at the beach. After all she was at 32 still young, still beautiful and divorced without children. She got the rental property and her house in the divorce. She consulted her accountant about the tax impact of selling it. He told her that she was going to get hit pretty hard with taxes because her ex had depreciated down to nothing prior to giving it to her in the divorce. He suggested that there was something called a like kind exchange and that she should consult an attorney for the specifics. She went to see a real estate attorney, Geoffrey Dunder. Mr. Dunder agreed that a like kind exchange would work for her and that he could act as intermediary and paper the transaction. He went through the usual discussion of the identification rule of 45 days and the settlement rule of 180 days. She put her property on the market and started looking for her dream beach house. She immediately got a contract for the rental property from a nice couple with two kids and a dog. She was very happy that the house would have a good owner. The contract called for settlement in 30 days, she bumped it up to 60 days to give her time to find the replacement property. Geoffrey made sure that the appropriate language was in the contract to permit the like kind exchange.

She found a darling cottage in Ocean City, New Jersey. It was perfect. She could rent it out, and use it 14 days in May and in September and still get prime rental dollars. It had a new kitchen with all the energy efficient and high end appliances. She put a contract down and the price was workable with the other sale and the settlement date tracked so that it would occur shortly after the other contract settled. She smartly kept the sale of other property contingency in the contract in case something blew up. The old property settled and one week later she settled on the new property. The paperwork was flawless and she did not recognize any taxes on the transaction.

Reverse Like Kind Exchange

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Keeping on the subject of like kind exchanges.
ody Burden found a great deal on an office building. But he needed to sell the office building he owned, but didn’t want to lose the new office building. Bidding was hot and heavy, so he knew if he had a long settlement date he’s lose the office building. He went to his lawyer to ask what he should do. The lawyer replied, “How about a reverse like kind exchange. In that situation, you get a bridge loan from a bank and buy the other property and park the old property with a qualified intermediary. So long as they report the transaction on their taxes, its great.”

The lawyer called Sundasky Intermediary Company and they set up a Corporation to handle the transaction. After procuring the bridge loan which was secured by both old and new property, the old property was deeded to Sundasky Old Property Corporation and at that time Jody identified New Property to Sundasky. The new property was acquired by Jody, the same day. Within 180 days, Old Property was sold to Perry Prospector and the loan was partially paid off from the proceeds and Old Property was released from the Mortgage. No money went to Jody. Jody and Sundasky Old Property Corporation filed and reported the transaction on their tax returns. No income tax was payable.

Success, sort of!

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Cedric settled on the property, the money went to the qualified intermediary and 45 days later he found a great piece of vacant land to invest in. He settled pretty quickly, the intermediary wiring the money smoothly, and he deferred the taxes until he sells this land. He was thrilled. Feeling rich, he went by the Biker’s shop and bought a new Crotch Rocket. Two days later, he died in a a motorcycle accident. His family got to step up his basis in the property (as is allowed after a loved one dies) to the date of death value, and they quickly sold the land and paid no income taxes on the transaction.

I’ll trade you a condo for a farm

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We are now embarking on a short tale about the concept of like kind exchanges. The Tax Code permits the tax free exchange of property of like kind so long as no cash or non-like kind property changes hands. We will start with the easy tale of the pure unvarnished like kind exchange and move to tales involving more complex portions of the law.
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Cedric bought a condo for rental in 1990 for $200,000. As required by law, he took depreciation (whether he wanted to or not) from 1990-2009 in the amount of $125,000. In 2009, out of the blue he was offered $500,000 for the condo. He consulted his accountant, Frank Dinero.

“Cedric, you’ve got a gain of $425,000 which means that your state and federal taxes on the sale will be $85,000.” Cedric left saddened and went to Tough Times Bar to drown his sorrows. As he was having his fifth beer, a biker sat down beside him. “You look low man”, the biker said. “Yeah, I guess I shouldn’t be upset, but I learned that in selling a condo I bought for investment that I’m going to owe a lot of taxes”. The biker frowned for a second and said, “what are you going to do with the money?” That question caught Cedric a bit off guard and caused him to be suspicious. “Why are you askin?” Cedric responded. “Whoa man, just thought if you was going to invest in other real estate you could defer some taxes”, the biker said raising his open hands. “What?” Cedric replied.

“I was sellin my garage to another dude because I needed a bigger one for my custom bike business. My lawyer put me onto this trick called a Like Kind Exchange. And I rolled all my gain into my new building and paid zero taxes.” “Really?” Cedric asked. “I’m not shittin’ ya man?” said the Biker. “Thanks”, Cedric said, “what are you drinking, I’m buying”, Cedric continued, “Bartender give this guy whatever he wants to drink”.

The next day Cedric called his lawyer, “Have you ever heard of a like kind exchange?” “Yeah, but you should talk to a tax lawyer about that, one of my partners here a Mr. Ito Brassballs can help you.” Cedric made an appointment with Ito.