Posted by ray@lcorn on March 30, 2002 at 19:48:03:
Todd,
The simple answer to your question of who determines intent is “you”. But that avoids the real issue, which is how the Service will determine your intent if the exchange comes under scrutiny.
This is a gray area of the IRC, and subject to the interpretation of specific circumstances. Intent is most often demonstrated by holding a property a certain amount of time. There is no minimum hold time for qualifying investment properties, though there is a general consensus among tax attorneys, CPAs and exchangors that two years is considered the “safe” hold period. More aggressive investors will push the envelope and exchange property held only a year. You’ll find that your accountant or even an intermediary will often call the tune, but it is ultimately up to the investor. And because of the uncertain hold time, the real acid test is intent.
I have read of instances where a property was exchanged within months of acquisition. As I remember the particular circumstances, the exchanger acquired the property, listed the units for rent, and actually performed substantial improvements for benefit of the tenants. He also had engaged a broker to market the rental space. An unsolicited offer to buy the property came along, and he completed a delayed exchanged for another property. The exchange was upheld because the taxpayer had evidence of taking the requisite actions to hold the property for investment, i.e. rent it out. Had he acquired the property, done the improvements, while also offering the property for sale, then the property would not have qualified, and the exchange likely disallowed. Property acquired for the purpose of resale is considered dealer inventory and is not eligible for like-kind treatment as investment property.
And beyond the question of intent, there is the matter of creating a pattern of dealing. Had the taxpayer in the above example done subsequent “quick-trigger” exchanges, or had a history of flipping similar acquisitions, those would likely have been disallowed because of the pattern of dealing.
Exchanging is not a DIY project. Some of the rules are very clear, and must be adhered to exactly. Other questions, such as the above, are not so clear, and the consequences of a disallowed exchange can be very expensive.
I prefer to have the backup of professional accomodators (qualified intermediaries) and accountants. That does not mean I won’t argue with them. I love to make them think. I consider it my job to create and state my case in such a way that reasonable people can accept it. That means I have to know as much, if not more, about my transaction and the relevant tax law as the professionals do. That’s why I hang out with people like John Hyre!
ray