Exchanging Properties

New handbook clarifies many nuances involving tax-deferred exchanges.

Real estate tax expert Mark Lee Levine, CCIM, JD, LLM (Tax), has published the Handbook on Exchanging Real Estate, a one volume work on tax-deferred exchanges in real estate. Most CCIMs are familiar with the value of using tax-deferred exchanges. On a personal basis or for clients, such tools for tax deferrals have enabled many commercial real estate brokers to work with clients to sell property that would not otherwise have been transferred, if the taxes were not avoided on the exchange. Thus, more commissions have been generated for CCIM designees because the deferral of taxes was possible when the Exchange technique was employed.

The focus in the Handbook is on the key issues that arise with exchanges. While Levine has various lengthier books that address the details on exchange issues, the Handbook is intended to give quick, practical answers that accurately address investors' concerns about following the Exchange rules for Internal Revenue Code Section 1031.

This new Handbook contains areas of coverage on issues such as: Why does the exchange tool (IRC 1031) exist? Of course, given the history of this rule, starting back in 1921 when the U.S. Congress passed the first iteration of the law, commercial real estate professionals have seen how the ability to postpone the payment of taxes on gains from the disposition of qualified real estate has been a wonderful, legal approach to allowing investors to move from one investment to another property, without diluting the investment dollars by currently paying taxes.

The book also addresses the practical issue of when to use IRC 1031 exchanges - and when to avoid them. According to Levine, “There are many situations where the exchange tool should not be employed.”

Classification of property is critical for exchanges as some property, such as dealer property, will not qualify for tax deferral under IRC 1031. To come within this exchange rule, Levine notes that the property involved in the exchange must be “qualified property” and “like kind property.”

The Handbook examines several cases where these definitional requirements were and were not met. The prudent CCIM needs to know these requirements to support the needs for their clients, as well as to assist CCIMs who are undertaking an exchange for their own accounts.

Additional issues addressed in the Handbook include these five crucial discussions for CCIMs to assist their clients.

  1. What are the requirements to meet the “tax deferred, deferred exchange” rules?
  2. Can entities holding real estate also undertake exchanges  within 1031?
  3. What are the rules as to basis, holding periods, and other technical 1031 Rules when undertaking an exchange?
  4. Can you combine IRC 1031 with other tax rules, such as  installment sales?
  5. Can you have an exchange within IRC Section 1031, followed by another transfer and still come within IRC Section 1031? Or will the subsequent transfer, which occurred shortly after the exchange, destroy the IRC Section 1031 position?”

At about 400 pages, the reader may quickly reference the sources and tables for listing revenue rulings, revenue procedures, cases, and other related exchange materials. Most importantly, this Handbook allows commercial real estate professionals and investors to be more successful - and more profitable - when disposing of property by employing the exchange tool under IRC 1031.

This Handbook is available in hard copy and electronic form on Amazon.com.

Tax Man

Mark Lee Levine discusses his new book about tax-deferred exchanges.

Author, professor, expert real estate tax attorney, commercial real estate investor, commercial real estate professional, and expert witness are among the many professions that Mark Lee Levine, CCIM, JD, LLM (Tax), has juggled throughout his 45-year career. His expertise in commercial real estate tax law - nationally and internationally - has been an abiding force in the multiple books he has written. Levine discusses how his latest book, Handbook on Exchanging Real Estate, is a useful reference for commercial real estate professionals, how tax-deferred exchanges help propel property sales, and why he writes so many articles and books. 

CIRE: Why is it a good time for writing and publishing the Handbook on Exchanging Real Estate?

Mark Levine: There are many reasons for commercial real estate professionals to conduct exchanges, and those reasons change over time and during specific transactions. The biggest reason for the use of 1031 is that an exchange can defer paying federal taxes.
Another reason for an exchange is the common disagreement about property values. Sellers often think their properties are worth more than buyers do. Both buyers and sellers, however, want to defer taxes, this common desire to defer taxes may provide the common ground to consummate the transactions.

CIRE: What if Congress eliminated the popular Internal Revenue Code 1031 exchange?

Levine: Nearly every year, legislators from both parties discuss eliminating tax-deferred exchanges. I don't think it will happen any time soon.
How many billions dollars are in there in exchanges annually? How many would still take place if law was changed? I don't know the answers, but I do know commercial real estate brokers would lose transactions. The economy would lose some of the free flow of property, because taxes will restrict this flow.
Overall, the elimination of 1031 would not be good for the U.S. economy. There would be adverse implications for investors, title companies, real estate attorneys, brokers, individuals, and companies. If the U.S. Congress takes this tool away, it would be analogous to taking a specialized scalpel from a surgeon. Operations will still be performed, but they might be better performed with better instruments.

CIRE: What makes tax deferred properties so essential for CCIMs who invest and the clients they work with?

Levine: Since 1921, the IRC 1031 exchange law has proven to be beneficial and versatile. These exchanges allow for the transfer of property without creating an immediate tax liability; such an option encourages the transfer of property. It's a useful tool for small businesses, big businesses, investors, clients, brokers, and others.

CIRE: Why should CCIMs read this Handbook?

Levine: CCIMs will find it a useful tool because it offers a review of fundamental exchange rules, when an exchange may be good planning, and a discussion of other real world issues. The Handbook also defines what qualifies as like-kind exchange properties.
For example, your primary residence doesn't qualify for a 1031 exchange. However, you could exchange an apartment building that you live in with 100 units, without including the one unit you live in. The Handbook provides guidance about how to structure the transaction to come within 1031.

CIRE: What do you want CCIMs to take away from this Handbook that helps them in their day-to-day transactions?

Levine: CCIMs should treat this Handbook as a tool to use when it fits.  Like every other tool, CCIMs should use it in a setting that makes sense. Sometimes the best answer is not to exchange under 1031.

CIRE: You are a prolific author. Why have you written so many books?

Levine: I don't set out to write a book. However, writing books helps me solidify, organize, and sort out my thoughts.
For example, my partner and I owned an office building, where our law firm was located. Several years later, we figured out a way to sell the building, which in turn helped an organization for autistic children.
From reading and writing cases, articles, and books, I have tried to think more creatively. In this instance, we benefited financially and helped a good group in our community. 

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Sara S. Patterson

Sara S. Patterson is executive editor of Commercial Investment Real Estate.