Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Have Backups

Posted by taxguru on July 24, 2003

With many of our clients involved in real estate investing, as well as consulting with Sherry’s exchange company, we often see people make unwise moves (aka screw-ups).

A frequent mistake people make comes in identifying the replacement property for an exchange. In classic putting all of one’s eggs in a single basket, too many people set their sights on a single property and don’t have any backup properties listed by the end of their 45 day identification period. Anyone who has been around real estate transactions knows that deals can fall apart for any number of reasons and at any time, including at the very last minute. The Harrison Abstract fiasco is a perfect example of completely unexpected circumstances scuttling real estate deals.

If the original target property collapses before the 45th day, you can add new properties. However, if the deal for that intended replacement property falls apart after day 45, and there are no others listed, the exchange is canceled and the gain that could have been deferred becomes fully taxable. The moral of the story is so simple. Have at least one backup property, ideally two, listed by the end of the 45 day identification period.

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