Like kind exchange

[TAXMAN]

Tp wants to sell old rental house and build new rental house on property he already owns. I think tp may have a problem with the replacement time. Your thoughts on like kind exchange?

[DANRVAN]

There is no "exchange" in this situation.  Replacement period is moot point.

[Lee B]

1 hour ago, TAXMAN said:

 and build new rental house on property he already owns. 

Doesn't qualify

[ILLMAS]

I believe he would need to buy new land to qualify.

[DANRVAN]

38 minutes ago, ILLMAS said:

need to buy new land to qualify.

but if he puts a new building on the new land, the building does not qualify.

[Lee B]

There are extremely complicated tax free exchanges called "Build to Suit Tax Free Exchanges"

Here is one article:   https://www.exeterco.com/article_build_to_suit_exchange#:~:text=No matter which combined strategy,has been put into place.

[TAXMAN]

I think in this situation tp stated that he cannot get a house up in 180s defeats what he wants to do. I wonder if he could transfer land to contractor and have contractor build house then sell original rental house use proceeds to pay contractor. May not come out at 100%. You think this may work?

[Lee B]

If he really wants to do a tax free exchange, he could exchange the old rental house plus the second property for a third property land & bldg.

[DANRVAN]

1 hour ago, TAXMAN said:

You think this may work?

 Step transaction doctrine.  He sells land to contractor then buy it back?  I see an issue of substance over form.

 

[DANRVAN]

19 hours ago, Lee B said:

Here is one article:   https://www.exeterco.com/article_build_to_suit_exchange#:~:text=No matter which combined strategy,has been put into place.

The key is he cannot take possession of the land until the building is completed.

I don't think the article mentioned another strategy where contractor buys land (not the existing land) and constructs the building before the exchange takes place.

[BulldogTom]

Is the gain substantial and have you calculated the tax on the gain?   Is it worth it to do the exchange and take on the risk of trying to fit the transaction into the like-kind shoe?  What is the economic reality of the situation going sale vs exchange?

Tom
Longview, TX

[Sara EA]

A like-kind exchange has to go through a qualified intermediary.  Tell your client to contact one to see if his scheme is possible.

[DANRVAN]

23 hours ago, DANRVAN said:

strategy where contractor buys land (not the existing land) and constructs the building before the exchange takes place.

From an AICPA source:

Another potential structure is to insert a "straw man" on the front end to own and construct the property. For example, an exchanger could locate a builder who will act as the straw man and acquire land or a building to be renovated and construct the desired facility or make the requested renovations to what will be the replacement property. In this example, the builder is the owner of the project while the construction is taking place. This means that the exchange process has not started and, more importantly, that the 180-day exchange period has not started, so any construction delays are not potentially disqualifying. When the replacement property is ready, the exchange can be executed using a standard forward exchange.

Under the straw man exchange structure:

An unrelated party acts as a straw man to own the project while construction or renovation is taking place;

The actual exchange does not happen until the relinquished property is sold and the replacement property is ready for use;

A standard forward exchange can be executed;

Construction or renovation can begin before the sale of the relinquished property; and

The exchange can be further delayed if a buyer for the relinquished property is not identified until after the replacement property is available.

 

[DANRVAN]

23 hours ago, BulldogTom said:

Is the gain substantial and have you calculated the tax on the gain?   Is it worth it to do the exchange and take on the risk of trying to fit the transaction into the like-kind shoe?  What is the economic reality of the situation going sale vs exchange?

I agree with what you are saying.

I think it is a good idea to lay out all the options for the client and let him decide which direction he wants to go.

As Lee B pointed out the "Build to Suit" route is complicated and risky, but client should be aware of the option.

[mcbreck]

16 hours ago, Sara EA said:

A like-kind exchange has to go through a qualified intermediary.  Tell your client to contact one to see if his scheme is possible.

Every like-kind exchange plan that comes to me I tell them to hire a real estate attorney to facilitate the transaction and make sure it is done within the IRS guidelines. That small fee always kills it. I'm no expert on that stuff and there are a ton of maneuvers to make in a timely manner for it to qualify and I'm not taking that liability. When I went through the EA training, their definition of "like-kind" property was very different from what people use today.

[Lee B]

Yes, it's very interesting how some clients will as a knee jerk reaction avoid spending any money on legal fees

or spend any extra money on extra tax research/consultation