What is a tax deferred exchange?
A tax deferred exchange is no longer a complicated tax maneuver reserved for the wealthy. Congress has simplified the procedures and made it a viable option for all taxpayers. A tax deferred exchange is very similar to simply selling your property and then buying replacement property, except you don’t have to pay any taxes. Through the use of a Qualified Intermediary, you dispose of your existing property, the Qualified Intermediary holds the proceeds of the sale and when you select replacement property, the Qualified Intermediary purchases it for you. It is a simple and effective tax planning tool.
Who should do a tax deferred exchange?
Anyone who is selling real property (other than their personal residence) and plans to purchase other real property should consider doing a tax deferred exchange. While it is not appropriate in all circumstances, in most cases it will be the most profitable decision you will ever make.
What are the mechanics of an exchange?
While there are many variations to how exchanges are handled, a typical exchange would proceed as follows:
1. The Taxpayer lists his or her property for sale.
2. The Taxpayer enters into an exchange agreement with The Exchange Connection, Inc.
3. The Taxpayer signs a purchase and sale agreement with a prospective Buyer.
4. The Taxpayer assigns the purchase and sale agreement to The Exchange Connection, Inc.
5. The Exchange Connection, Inc. instructs the escrow agent to complete the sale by deeding the property to the buyer and transferring the proceeds to an insured bank or brokerage account which accrues interest for the benefit of the Taxpayer.
6. The Taxpayer locates one or more replacement properties and enters into a purchase and sale agreement to acquire them.
7. The Taxpayer assigns these purchase and sale agreements to The Exchange Connection, Inc.
8. The Exchange Connection, Inc. instructs the escrow agent to deed the replacement property to the Taxpayer and arranges for the transfer of the proceeds from the secure account to the escrow.