Strict adherence to the guidelines set forth within the tax code is required for a successful exchange. Investors should be aware of four basic requirements when entering into a delayed exchange, and should seek the advice of their tax accountant or attorney to ensure proper adherence to the tax code. The four basic requirements for a successful exchange are:
- Property Qualifications
The internal revenue code requires that the properties involved in an exchange must be held for productive use in trade or business or for investment, and they must be "like-kind".
The 'like-kind" requirement is often a source of confusion for investors. All real estate is like-kind, with the exception of real estate outside the United States. For example, provided the properties are within the U.S., an investor selling a rental home can exchange into a four-plex. Similarly, an investor selling a warehouse can exchange into a percentage interest in an office building.
Dealer property, or property held as inventory does not qualify for an exchange. The most important factor in determining whether a property is dealer property or inventory is "intent". Upon an audit the IRS will take a careful look at what the investor intended to do with the property at the time of acquisition. If the IRS feels that the intent of the investor was to quickly resell the property, it could be considered dealer property, or inventory, and ineligible for exchange. For more information on dealer issues, please see the FAQ
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