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.