Property Exchanges Gain in Popularity; Rules Allow Investors to Defer Tax Payments on Sales
Real estate investor Don Baird wanted to sell his half interest in a small apartment building in Arlington earlier this fall to buy two other Northern Virginia houses. But, with the loss of tax breaks for capital gains this year, Baird was facing a $40,000 tax bill for a move designed to net him some cash and allow him to reinvest in other property.</br></br>As it turned out, he managed to unload the apartment building, pocket $30,000 and whittle the taxes down to a few thousand dollars. He did it by taking advantage of a tax-deferred property exchange-one of the few loopholes left to real estate investors after Congress overhauled the tax code in 1986.</br></br>Exchanges allow investors to swap their property for another without paying taxes on the profit until they sell their new acquisition. The maneuver straddles a fine legal line involving an outright sale because, instead of having to do a simultaneous trade, as the word "exchange" would suggest, investors can first sell their property and then, within 45 days, place a sales contract on the land they want to acquire. They must close on the deal within six months of the sales contract.</br></br>Exchanges are essentially real estate investors' version of the special rules that allow homeowners to roll over proceeds from the sale of a personal residence into another house within two years and avoid paying taxes on the profit until they sell their last house. However, homeowners cannot use exchanges for personal residences. There is no limit to how many times an investor can exchange property and keep deferring taxes on profits from each deal.</br></br>In Baird's case, he said he knows that he eventually will have to pay taxes-"or at least my heirs will."