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Kevin Hummel
Certified Exchange Specialist® (CES®)
Certified Exchange Specialist® (CES®)

The New Tax Law?

Everyone is watching the news every day and they are calling me and asking, “What is the impact of the new tax law on Exchanges?” Never is it more important than when approaching a new tax season.

Tax Deferred Exchanges have not changed
When dealing with Investment property, owners can still do §1031 exchanges for real estate, which has been in the tax code since 1921. No new restrictions.
They have repealed exchanges that are not real estate. Exchanges of personal property, collectibles, aircraft, franchise rights, rental cars, trucks, heavy equipment and machinery, etc. Those will no longer be permitted beginning in 2018.

How to Start a New Exchange
It is quite simple. We do not require a consultation. In most cases, a simple phone call to me could begin an exchange. There is also no requirement for us to have original or notarized documents. In most cases, the communication just happens during the escrow process. The only exception would be if there were significant issues law or tax questions where an attorney was necessary. In those cases, a $150 attorney consultation could easily be accommodated at one of our 4 offices or via phone, by calling our office main office 253-383-1200. That fee would be applied to our exchange fee if it is initiated within 6 months of the consultation, so it is not an additional cost.
Otherwise, just give me a call directly, at 253-284-3814 direct, or 253-882-9199 cell.
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Related Parties

Basis Shifting
When attempting to defer capital gains, the IRS puts an additional scrutiny when they see family members, or closely held organizations are selling to each other. What they are concerned with is when these related parties coordinate sell or purchase properties in such a way that they avoid paying taxes.
In 1989 the IRS actually amended §1031 for what they call Basis Shifting. This is when a property with a low basis (held a long time with a large gain in value) is sold to a third party in order to purchase a property from a related party that has a high basis (recently purchased with no gain)
In other words, the exchanger is deferring taxes while the related seller recognizes little to no gain. As a family, they have shifted the low basis to a high basis without recognizing any significant gain.
Who is considered to be a related party?
In simple terms, this includes family members (siblings, spouse, ancestors, and lineal descendants)
Brothers and sisters Yes
Spouses Yes
Parents and children Yes
Grandparents and grandchildren Yes
Cousins No
Uncles to nephews No
Aunts to nieces No
In-laws No – Surprise!!!
Trust and Trustee or Beneficiary Yes
Partner or Corporation with a 51% ownership Yes
Partner or corporation with a 50% ownership No – Surprise!!!

How to avoid this additional IRS Scrutiny
First of all, you cannot avoid this by simply transferring the property to a “non-related” third party. One of the easiest ways to avoid additional IRS scrutiny is if both parties of the transaction are each doing their own exchange. That way no taxes are completely avoided, they are simply deferred, with the idea that they will eventually be paid.
Another way that might avoid this scrutiny is if each property involved is held a full 2 years before and after the transaction in question.
What to do?
It is not scientific, but sometimes you have to apply the “smell test”. If it really does not seem that it should be allowed, it probably should not happen. Whenever you are contemplating such an exchange that might involve a related party, let’s talk about it. These kinds of issues can often lead to other questions, and that is why we are here. You can set up a $150 Consultation over the phone or at one of our offices by calling the office number below. If you begin an exchange within 6 months of the appointment, that fee would be applied to your exchange.
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