THE SEQUENCE OF A Standard Exchange

Occasionally we'll receive a question along these lines: "Do you have something that shows the sequence of a typical exchange?"

Every exchange seems to have a little something that's out of the ordinary, but let's see if we can create a sequence of events that gives you some idea. Of course the first thing is that the client and Iowa Equity Exchange learn of each other in some way. Many times that happens in a phone call from the client to us, when we hear "[This person] suggested I get in touch with you about an exchange." We're always pleased to know that someone thinks enough of us to refer their friend, client or colleague!

Okay, let's look at how things might go from that point:

  1. Generally, we'll have a conversation with each other about your situation, your hopes, and your plans. We'll discuss the property you are selling to make sure it makes sense to start an exchange.

  2. Assuming we're going to go forward, the next step is for us to obtain a copy of your signed purchase contract for the sale of your relinquished property. With that and some other information, we can prepare and deliver to you a set of exchange documents for you to review. You'll need to sign and return those to us in advance of the closing so that your "intent to exchange" is declared in writing and prior to closing.

  3. Upon receipt of the signed exchange documents, we will begin to coordinate things with the closing agent for your sale. Typically, we will begin that process a week or two before your target closing date. We prepare and deliver a set of closing instructions so the closer knows how to handle the closing and comply with our needs for your exchange, and also where to send the proceeds of your sale.

  4. On or just before the closing day, we will sign your closing statement, as will you. The closing will occur, the closer will wire the proceeds to the specific account we have established with our bank for your exchange, and your exchange will have started. We call this day "Day Zero" of your exchange. This is when the sequence begins to break down a little, because in some cases our client knows the property he wishes to buy as his replacement property, and in other cases, that property has not yet been found. If you already know what you're going to buy and your closing is going to take place within the 45-day period immediately following the closing of your sale, you can skip items #5 and #6 and go to item #7 below.

  5. If you've been planning ahead (strongly recommended, by the way), you've already become familiar with the market in whatever it is that you hope to buy as replacement property. You might have already made one or more offers on possible replacement property. Keep in mind that you may make offers at any time in the exchange process; the only dates that matter are closing dates. If you can get your replacement properties under contract during the 45-day ID period, you stand a much higher chance of having a successful exchange. Not locating suitable replacement property in the 45 days allocated for identifying is the source of more exchange failures than any other. So identifying replacement property is the next step in your exchange: during the 45 calendar days after Day Zero, you must identify the replacement property you are considering. You will do so on a form that we will provide to you. There are essentially two "rules" you must follow. (Technically there's a third one that is used only in the rarest of instances.) The rules are "progressive" in the sense that if you do not follow the first one, you must follow the second one. The first one allows you to identify up to three properties. Period. There are no other limitations other than that the properties must qualify as replacement property. They can be any value individually or in total. Just not more than three. If you must identify more than three, you may do so. However, there's a new limitation now, and it is value-oriented. If you identify more than three, their combined fair market value may not exceed 200% of the fair market value of the property you sold as relinquished property. For example, if you sell a property for $1 million, you may identify five properties whose total fair market value does not exceed $2 million. Obviously, you will be identifying several smaller (in value) properties if you utilize this option. When we receive your identification form and it is fully completed, we will confirm its receipt so you have additional verification that it was submitted prior to the deadline.

  6. Now that you've identified your potential replacement property, you must get it (or them) under contract if you have not already done so. Keep this in mind--after the 45th day passes, you may not buy any property that is not on your list of identified properties. That is why I urge you to try to get your replacement property tied up with a purchase contract before the end of the 45th day.

  7. As with the relinquished property, when you have a fully executed contract, you will need to provide a copy to us. We also will need to know who is going to conduct the closing so we can coordinate the exchange with them. We will review their paperwork for compliance with the instructions we have provided to them and obtain their wiring instructions to get your funds to them for the closing. Remember that you have 180 calendar days to complete your exchange, so any replacement properties you wish to acquire using exchange money must be closed within that time period. (The 45-day ID period and the 180-day exchange period run concurrently!)

  8. After your last replacement property closing, your exchange is over. At that point, all that's left is to report it on Form 8824 on your tax return for the year in which the first closing occurred. In order to prepare Form 8824, you will need to provide your tax preparer with copies of all closing statements and a copy of your identification form. Your tax preparer should have all of the other information to complete the form, but we are always happy to provide any relevant documents upon request.

That's it in what really can't be called a nutshell. There are many, many other little twists and turns that invariably arise, and lots of behind-the-scenes activity, but I believe the above comments will give you a fair idea of what happens in the typical exchange. Please get in touch with any questions.