Using a qualified intermediary for the deal

Are you finding it difficult to sell investment property in this real estate market? One possible alternative is to arrange an exchange of properties with another owner.

Tax payoff: If the properties qualify as "like-kind" properties, you do not have to pay current tax on the exchange. This refers to the nature, character or class of the property--not its grade or quality. For example, you might swap an office building for an apartment building of the same value. As a result, neither party may be liable for tax (but see below).

However, trading real estate properties is usually not so simple. Typically, you might have your eye on a particular building, but the owner is not interested in any of the properties you own. In that case, the exchange may involve multiple parties.

The IRS has approved the use of a qualified intermediary to facilitate the deal, as long as the intermediary is not connected with one of the parties.

Example: Say that Alice sells property that will be relinquished to Barry. Barry pays an intermediary, Cheryl, instead of Alice. The intermediary holds the sales proceeds on Alice's behalf until a suitable replacement property is identified.

At this point, a qualified intermediary uses the sales proceeds to purchase the replacement property from another owner, Derek. Finally, the intermediary transfers this property to Alice to complete the like-kind exchange.

For tax purposes, Alice is considered to have swapped properties tax-free with the intermediary. This is permitted because she never actually sees the cash from the sale of the relinquished property nor is any additional cash paid to acquire the replacement property.

Of course, qualified intermediaries charge for their services, so this cost must be figured into the transaction. More details are available upon request.

Be aware that there are two time restrictions involved in a multiple-party swap. The property you are receiving must be identified within 45 days of the original transfer, and you must take title to the property within 180 days (or your tax return due date plus any extensions, if that is sooner).

Caution: If you receive any money or property as part of the deal, the additional amount (referred to as "boot" by tax practitioners) is subject to tax. However, no loss is recognized by the taxpayer who provides the boot. Note that the assumption of a greater mortgage is also treated as boot for this purpose.

The amount of taxable boot is equal to the lesser of the realized gain (i.e., the difference between the tax basis of the property you are relinquishing and the fair-market value of what you have received in exchange, including any boot) or the fair-market value of the boot.

This is a complex area of the tax law. Be sure to consult with a professional tax adviser before you sign any contracts.