To Accommodators:
Do/should you require a purchase agreement and pr for an upleg property before you send a deposit? I ask because what hazards, if any, are there if the exchange cancels with only deposits sent out, but still has funds in the exchange? Is the exchange closed normally with boot, or is it terminated like a failed exchange.
Once the identified replacement property has settled, any money still left in the exchange escrow account becomes taxable boot.
Absolutely, I agree with you “if” the replacement escrow closes. I’m curious about how it’s classified under the following situations:
Under both situations, my gut tells me that it should be classified as a failed exchange, with 3 1/3% withholding done on the purchase price of the relinquished property(ies). It nags me though that we’ll do the “boot” calculation on an exchange if any money was sent to a replacement property that closed.
I think it should still be done as a failed exchange because otherwise creative investors with long escrows would simply send deposits large enough to clear out their exchange account, and then terminate the exchange on the 180th day…or if they never sent an ID for the replacement property, they could terminate on the 45th day and cite that as the reason for termination. In
both situations, all the money in the exchange is used, there’s no boot left to do withholding on, and the exchange is terminated.
So…what do you think?
I am not an accommodater, just an experienced exchanger.
There are three ways to terminate an exchange involuntarily.
[]Fail to identify a qualified replacement property within the 45 day identification period, or, []Fail to acquire an identified replacement property within the 180 day exchange window, or, [*]File your tax return for the year the relinquished property was sold BEFORE the exchange is closed.
Your circumstances fit the second failure scenario. In each instance, you have a failed exchange because you failed to ACQUIRE a qualified property from your list of identified replacement properties within the 180 day exchange window.
In a failed exchange, the profit from the relinquished property sale is taxed as capital gains and depreciation is recaptured just as if the exchange had never been opened in the first place. Your tax treatment in this situation is not affected by your subsequent use of the “exchange” funds (whether retained, or returned).