It’s third down with seven yards to go and four minutes left in the game.
The quarterback studies the anxious faces of the opposing team as he calls the play. On command, the center snaps the ball. The quarterback drops back, scans the field and weighs his options. What’s he going to do?
The quarterback must make a decision. Should he pitch the ball to his running back, pass it to his receiver or just take off and run with it?
His decision could impact the outcome of the game. And yet, his responsibility is not much different than your own if you are a real estate executive or investor. You too have important decisions to make – ones that can powerfully influence your financial future.
Consider, for example, the concept of like-kind property exchanges. This vehicle for tax-deferred exchange can provide exceptional tax advantages. What is a like-kind exchange? Simply stated, it is an exchange of property held for productive use in a trade or business or for investment where the property received is of a like-kind and is held either for productive use in a business or for investment. Real property is considered like-kind to other real property as long as the properties are owned as an investment or used in a trade or business. Personal property exchanges require that the relinquished property and the replacement property be in either the same general asset class or product class. The term “like-kind” refers to the nature or character of a property, rather than its grade or quality.
All real estate in the United States is considered like-kind to all other U. S. real estate. A Dallas high-rise is like-kind to a strip center in Fort Worth. A retirement community in Plano is like-kind to an apartment complex in Cisco or a parcel of vacant land in Waco.
A like-kind exchange may benefit your financial game plan, and like the quarterback, you have options.
There are a variety of ways to implement an exchange and each has different implications for your future. Just as the quarterback reviews game tapes to gain knowledge, you too need to analyze market conditions and personal expectations to determine which option is right for you.
Perhaps you should implement a forward exchange. This is a simple transaction where you simultaneously trade one property for another. Perhaps you own a shopping center but believe the market is in a position where you could realize a greater return in the apartment business. In this case, you trade your commercial center for an apartment complex of equal value.
Then again, you might have a buyer for your shopping center, but you haven’t yet located the apartment complex you want to buy. In this case, you could relinquish your ownership of the shopping center with the sales proceeds maintained by a third party until you locate the property you desire. This is a delayed exchange. It is useful when the closing for the replacement property occurs at a later date than the closing of the relinquished property.
How about a reverse exchange? If properly structured, your replacement property can be acquired before your old property is sold. While as difficult to execute as the classic “end around” on the gridiron, a reverse like-kind exchange should be considered if the replacement property is identified and must be acquired prior to the disposition of the original property.
Still, you may face a more complicated situation where you are in a relationship with other investors and you have conflicting needs and objectives. Perhaps you own a shopping center in a limited partnership with other partners. All partners are in agreement to sell the shopping center. Unlike your partners, you would like to effect a like-kind exchange into an apartment complex. However, your partners would like to cash out. In this case, the partnership could distribute a portion of its property to the partners who do not want to participate in the proposed apartment complex. This allows the real estate owned by the partnership to be equally divided among the owners so that, at closing, your portion of the proceeds are set aside for exchange into an apartment complex while the other partners leave the closing with cash.
A final option that has recently gained significant popularity is the use of “tenant-in-common” interests. This option, if carefully structured, allows the seller of real estate to treat the acquisition of a TIC interest as replacement property and thus treat the disposition as a tax-deferred exchange. If you’ve sold property, desiring like-kind exchange treatment, and are running out of time, your option is to contact a TIC promoter or syndicator. They are currently acquiring real estate with the objective of making the property, through TIC interests, available to sellers so they can complete their like-kind exchanges.
Like the quarterback, you need to make decisions based on experience, knowledge, research and your gut feeling. Just as the quarterback builds his strategy by considering the defense’s strengths, weaknesses and behavioral tendencies, you also must build your strategy by analyzing the pros and cons and potentials that your investment research and tax planning reveals. And, like the quarterback, you need a contingency option based on what the defense potentially may do. In your case, the “defense” is the marketplace and the tax laws. Understanding their patterns and potentials will help dictate action and keep you headed toward your ultimate goal.
