The easiest way to avoid future IRS problems is to seek out the advice of qualified professionals, beginning with your real estate agent. After that, talk to real estate attorneys and/or experienced accommodators.
Before you make any final decisions, make sure you’re comfortable with whomever you’ve entrusted to handle the exchange, as well as your own knowledge of what’s taking place. Always follow the timing rules. In order for an exchange to be valid, you have to meet two requirements:
1) The replacement property must be identified within 45 days of the closing and transfer of the relinquished property.
2) The replacement property must be received within 180 days of the closing and transfer of the relinquished property or the due date (with extensions) for the transferor’s tax returns for the taxable year in which the transfer of the relinquished property occurs.
The IRS takes these rules very seriously, so they must be strictly followed. Any deviation will trigger an audit and your exchange will be disallowed. Partnership splits are particularly complicated when they involve a 1031 exchange. What may seem simple at first glance could easily have unforeseen consequences, so be sure to seek out the advice of professionals experienced with this particular issue.
If you’re exchanging with a relative, special rules apply. Basically, if either relative resells or otherwise disposes of the property within two years, the entire exchange will be disallowed and the tax on the original exchange must be recognized as of the date of the later disposition.
It’s also possible to transact a reverse exchange, in which the replacement property is acquired before the relinquished property, under certain circumstances. This can be done for a number of reasons:
1) Concern about finding the right property.
2) Picking up a great deal on distressed property.
3) The sale on the relinquished property falls apart.
4) The desire for a customized property.
Reverse exchanges are more expensive to undertake because of their complicated nature, but they can still be worthwhile in the right situation.
Please note that this Scottsdale Real Estate Blog is for informational purposes and not intended to take the place of a licensed Scottsdale Real Estate Agent. The Szabo Group offers first class real estate services to clients in the Scottsdale Greater Phoenix Metropolitan Area in the buying and selling of the best Luxury homes in Arizona. Award winning Realtors and Re/MAX top producers and best real estate agent for Luxury Homes in Scottsdale, The Szabo group delivers experience, knowledge, dedication and proven results. Contact Joe Szabo at 480.688.2020, [email protected] or visit www.scottsdalerealestateteam.com to find out more about Scottsdale Homes forSale and Estates forSale inScottsdale and to search the Scottsdale MLS for Scottsdale Home Listings.