QUESTION: I just received a job promotion, but it involves moving out of town. This is no problem because my employer's relocation firm will purchase our house, so we don't have to worry about selling it. However, we also own a six-unit apartment building which we will need to sell because managing it from a long distance doesn't make sense. But we have owned the apartments about 12 years, so we will have a large profit. You have mentioned tax-deferred exchanges quite frequently. How can we use such a trade to avoid paying tax on our apartment building profit?
ANSWER: It's easy. Just make a Starker delayed tax-deferred exchange. Internal Revenue Code 1031(a)(3) authorizes such trades. The first step is to sell your building. However, the sale proceeds must be held beyond your constructive receipt by a third-party intermediary such as your bank trust department. A good real estate or tax attorney can prepare the exchange agreement for you.
You have 45 days to designate the property you want to acquire and 180 days to complete the exchange acquisition.
Importance of Title Insurance
Q: About three years ago, I paid $5,800 for rural land which I thought would be a great investment because of location.
Now I have a chance to sell my land for $10,000. However, the buyer insists on getting title insurance. But the title insurer says there is an unpaid IRS tax lien against the previous owner for $4,822 that I must pay to deliver clear title. What should I do?
A: The title insurance company is correct that the IRS tax lien against the previous owner still affects the land. The IRS could foreclose against whoever owns the land, regardless of the fact the lien was attached when a previous owner owned the property.
Since you presumably did not obtain an owner's title insurance policy, you may be able to negotiate a partial payment to get the IRS to release the land from the lien. If not, it looks like you won't be able to convey marketable title.