Tax-Deferred Exchange Uses ‘Accommodator’

One subtle comment in Benny Kass’s “Guide to the Basics of Tax Free Exchange” deserves special emphasis because it is commonly misunderstood in the many so-called tax-free or tax- deferred exchanges that are being put together today.

The most typical scenario today goes like this:

1--The taxpayer (wanting tax deferral) has a buyer for his property and opens an escrow in a “Buy/Sell” format, which includes a statement that the seller intends to make a 1031 exchange and the buyer agrees to cooperate. Buyer agrees to pay cash.

2--The taxpayer finds his replacement property and opens another escrow in which he is the buyer (intending to complete a 1031 exchange) and the seller agrees to cooperate.

3--The first escrow is closed and the money is transferred into the second escrow which is then closed. No accommodator was involved. The taxpayer and many escrow officers and real estate agents believe a tax-deferred exchange has been completed.

Not so. It fails because there was no reciprocal transfer (exchange) between the taxpayer and the owner of the replacement property. Two buy/sell transactions took place and no exchange, which was the second of the three conditions set forth by Mr. Kass.

Taxpayers who want 1031 treatment need the assistance of qualified experts in law, tax and real estate exchange brokerage or consulting to assist them in properly structuring these transactions to avoid this common pitfall. Experts with appropriate training and experience are well worth the effort to locate, as there are usually tens to hundreds of thousands of tax dollars at stake.

BILL BROADBENT, San Luis Obispo