Although like-kind exchanges are common among real estate investors hoping to defer taxes, certain issues may reduce the appeal of one-for-one property swaps. In order to assure the tax deferral, replacement properties must be identified within 45 days of the sale of the original property and a deal must be closed in a total of 180 days.
Identifying a replacement property and closing on time can be a big problem. If one specified property doesn’t work, you may be left with a second or third choice, which might not be satisfactory.
The solution to such problems might be the “tenants-in-common” exchange. An investor will sell the original property and place the sales proceeds with an intermediary, just as in any exchange. However, instead of acquiring a replacement property outright the investor will buy a share in a larger, potentially more attractive property.
Such partial interests can be found readily, if a sufficient number of offerings is available, with varying amounts of cash required, to suit prospective investors. Thus, they can be specified within the 45-day deadline and the entire deal can be closed within the 180-day window. Ideally, taxes can be deferred, property management will become someone else’s responsibility, and you can trade up to Class A, institutional-grade real estate.
