The Many Myths about Tax Deferred Exchanges
The Many Myths about Tax Deferred Exchanges
From Kevin Hummel
McFerran & Burns, PS.
THE MANY MYTHS ABOUT TAX DEFERRED EXCHANGES
Not a day goes by that I am not reminded that our customers out there in real estate land have no clue whatsoever how a tax deferred exchange of real estate works. Today I would like to share with you one major myth: What does “Like-Kind” mean?
WHAT DOES “LIKE-KIND REAL ESTATE” ACTUALLY MEAN IN TAX DEFERRED EXCHANGES?
I know that you, as a real estate professional, KNOW all this stuff, however, the customers coming to you will not. I want all of you to know that the customers you help will be coming to you with preconceived notions and absolute misunderstandings about tax deferred exchanges. These misunderstandings can actually cause them to believe that they CAN’T do a tax deferred exchange and not even open the discussion with you.
SAM WANTS TO DO A TAX DEFERRED EXCHANGE OF HIS DUPLEX
Sam is pretty typical of the calls we get in our practice group each day. Sam is also pretty typical of a call to your office as well. He is a real estate owner of property that he has used for investment or for use in a trade or business. [In short, his property qualifies!!].
He has owned the property for a long time, but is disappointed that the neighborhood where the property is located is starting to deteriorate and the appreciation level he had in the past is quickly coming to an end.
He isn’t seeing the quality of tenant as a result. The rent he can charge is now less. The whole neighborhood is experiencing a financial downturn. What was a great investment property in the past is now at best mediocre.
Sam toyed with the idea of selling his property and contacted you. You gave him value and suggested that he contact his tax advisor [as all qualified licensees always do]. He was shocked to find out how much capital gains tax he would have to pay and, as a result, decided to just hold on to the property. Why should he sell with all that tax to pay?
You follow-up with him to find out about a potential listing of his property for sale to which he quickly turns you down. He has to pay too much in capital gains tax.
Many licensees would walk away and lick their wounds realizing that he wasn’t a good seller candidate. However, he STILL may be a good candidate! How?
You go back and talk with him having a new idea in mind. He can do a tax deferred exchange!!! Armed with that idea you find yourself rebuked again. He doesn’t want to do a tax deferred exchange as he doesn’t EVER WANT TO OWN ANOTHER DUPLEX IN HIS LIFE!!!! Oh well. You did your best. You go on to another customer. Should you? Do you?
SAM IS THE POSTER CHILD OF A SELLER THAT DOESN’T REALLY UNDERSTAND WHAT “LIKE-KIND” MEANS
The Broker let Sam’s ignorance and misunderstanding get in the way of a potentially successful business relationship for heand you as his Broker. You see, Sam thought that “like-kind” actually meant “like-kind” i.e. that he has to exchange out of a duplex and obtain another duplex in a qualified tax deferred exchange. He is wrong, but you can’t blame him as one would expect that “like-kind” means “like-kind” or a duplex for another duplex.
In the magic world of tax deferred exchanges real estate brokers have to understand that this area of practice has a vocabulary all its own and that words have meanings that are very different than what many consumers think. It is important that Brokers working with these customers understand the basics of tax deferred exchanges.
“LIKE KIND” HAS A VERY BROAD DEFINITION REGARDING REAL ESTATE FOR TAX DEFERRED EXCHANGES
The internet is part of the problem. Your customers start getting on the internet and read a variety of articles and sometimes (many times actually), come to inappropriate conclusions. Why? There are certain types of tax deferred exchanges that REQUIRE almost exact mirror image. Such is NOT the case in real estate. Always focus on real estate in your practice. Don’t get caught up with your customers’ belief that they know all about them. They don’t.
In a real estate tax deferred exchange, Sam can exchange out of his duplex property and acquire another property, or even more than one property, so long as his new property acquired IS real estate and it is used either in his trade or business, or for investment purposes
WE NEED TO EXCHANGE OUT OF REAL ESTATE AND EXCHANGE INTO REAL ESTATE
My friends, this is an area that I see customers constantly misunderstand.
*****Can we exchange out of a rental house for a piece of raw land? YES.
*****Can we exchange out of a commercial building for a duplex? YES.
*****Can we exchange out of a commercial property used for our trade or business and acquire a rental house? YES.
*****Raw land for improved? YES.
*****Commercial for residential? YES.
*****Property for investment for property used in a trade or business? YES.
As you can see the definition of “like-kind” in tax deferred exchanges is extremely broad and allows for much creativity and opportunities for you to help and assist many parties for defer capital gains tax by taking advantage of this very lawful method of exchanges of real estate.
CONTACT ME WITH YOUR QUESTIONS... I’M ALWAYS HAPPY TO TALK TAX
I live and breathe tax deferred exchanges. We are involved with them throughout the United States. We are not limited to just the State of Washington.
I would be honored to talk with you regarding your tax deferred exchange questions. There is no charge to talk with me. I am available at (253) 882-9199 or you can email me at kevin@mbs-law.com.
Kevin Hummel
Manager
Tax Deferred Exchange Practice Group
McFerran & Burns, P.S.
Offices in Tacoma, Kent, Seattle (Northgate), Everett and Silverdale.
Phone: (253) 284-3814
