A YEAR-END EXCHANGE

This is the first in a planned series of case studies, where we take a look at specific exchange issues relative to a specific client. No real names, no real locations, no real property descriptions, but some good general knowledge. Hope you enjoy this new feature.

Joe called in the late fall of 2008. He was considering an exchange involving property he owned in Iowa. His concern was that he might not be able to find the specific type of replacement property he wanted. He was willing to take the hit from capital gain taxes if he couldn't find the right property, but of course he didn't really have a choice on that! We talked to him about the possibility of beginning an exchange and what would happen if he did not find a property he was happy with. Joe was in an enviable position, but could we convince him of that?

Because the closing on the sale of his relinquished property was scheduled for Dec. 1, his 45-day Identification Period would not end until the middle of January, 2009. His 180-day Exchange Period extended well into 2009 as well, of course. Therefore, if he began an exchange, he would have no access to his proceeds until sometime in 2009. What we explained to Joe was that those facts placed him in the position of controlling whether he reported his capital gain (assumed his exchange failed) during 2008 or 2009. As long as he made a diligent effort to complete his exchange, failure to complete it would allow him to choose to report the sale as an installment sale, with the proceeds not received until sometime in 2009. Alternately, and at his sole discretion, he could choose to report the gain in 2008 if it was to his benefit. If you recall, during the presidential campaign there was discussion of possibly raising the capital gain rate, and there was also discussion of possibly lowering the rate. With such uncertainty, the option of reporting in either 2008 or 2009 gave Joe the ability to conceivably wait clear until October 15, 2009 (assuming automatic filing extensions were done) to see whether the new congress and the new administration made any changes to the capital gain rate. We thought this was a brilliant strategy!

Alas, Joe elected not to pursue an exchange and was therefore subject to reporting in 2008. It all turned out fine for Joe since the capital gain rate did not change, but it still points out the value of the strategy. The situation arises every year in the late fall, though, so keep it in mind for future years.