Tax Deferred Life Style Change

Our client owned a number of investment/rental properties in a college town and he had actively managed “tenants, trash and toilets” for many years. Each new academic year brought new student tenants to train on the fine points of respecting landlord property and cohabitating with other twenty-somethings eeking out an education while having a good time.

Now in his fifties, our client was seeking a lifestyle change and his investment portfolio consisted primarily of real estate. His first assignment was to familiarize himself with the strict time requirements of Section 1031. All exchanges must be concluded within 180 days of the sale of the (existing) Relinquished Property. By day 45, a list of possible (new) Replacement Properties must be furnished to the Qualified Intermediary.

He was cognizant of the fact that once the 45th day has passed, no amendments or alternations to the list are permitted. Once he understood that his college rental properties were like-kind to all other real estate located anywhere in the United States, he set a plan in motion to relocate himself and his investment property.

Before selling his existing property, his next assignment was to fly to Hawaii and search out possible Replacement Property investments. After successfully locating three attractive paradise properties, he returned to begin the sale process of his Relinquished Property.

The sale of the Relinquished Property was staged over a twelve month time period in an effort to not put too much pressure on the relocation plan. If the market had been active, a shorter time period would have sufficed. When two Relinquished Properties were placed under contract, he engaged the services of a Qualified Intermediary (QI) and then contracted for one new island property.

The goal in an exchange is to go even or up in value and this two to one match gave him the best utilization of his sale proceeds. The sale of the first property triggered the 180 day time period to conduct the complete exchange. Since he already had identified the new property, he was not constrained by the 45 day identification requirement. The regular forward format was utilized and the transactions were completed in less than a week. The next step was to sell three more properties and aggregate the proceeds for the purchase of two additional island properties.

A new Exchange Agreement was drawn by the QI to describe the contractual arrangement. The three properties were sold to two different buyers but the closings were scheduled within the same month so that the funds could again be aggregated for the acquisition of the two new island properties.

The sale of the first Relinquished Property began the 180 day clock. The client sold his personal residence and used the provisions of Section 121 to protect his proceeds from any capital gains tax on the sale (up to $250,000 per taxpayer is excluded from tax). He elected to acquire a new residence in Hawaii and was not constrained by any time limits or value matches. A successful change in lifestyle with all of the tax benefits,  ALOHA!


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