Plan in advance. It’s the key to success in any exchange. Pay particular attention to the timing of the sale of the property you’re selling, estimating equity and debt replacement objectives to avoid boot, and retaining an expert QI (qualified intermediary).
Make every effort to sell before you purchase. If you identify an ideal replacement property before you sell, you may need to negotiate a reverse exchange (i.e., buying before selling). The IRS has guidance on this in Revenue Procedure 2000-37, but either the replacement property or the sale property must be parked with an Exchange Accommodator Titleholder for 180 days, pending the successful completion of the exchange.
Be mindful of the "napkin test" in a balanced exchange.
- If you are trading down in total value, you are potentially taxable to the extent of the trade-down.
- If you are trading down in equity, you are potentially taxable to the extent of the trade-down.
Miss your deadlines. The IRS will not honor the exchange if you miss the 45-day identification period or if you do not acquire the replacement property within the 180 day exchange period.
Change how title is held during the exchange. Changing how title to your property is being held or dissolving partnerships during the exchange may cause the exchange to be dishonored due to holding-period issues.