Legal Definitions - delayed exchange

A delayed exchange is a specific type of transaction, often referred to as a "Starker exchange" or a "three-party exchange," that allows an investor to sell an investment property and then acquire a new, "like-kind" investment property while deferring capital gains taxes. Unlike a direct swap of properties, a delayed exchange involves an intermediary who holds the proceeds from the sale of the original property.

Here's how it generally works:

• An investor sells their existing investment property.
• Instead of receiving the sale proceeds directly, the money is held by a neutral third party, known as a Qualified Intermediary (QI).
• After the sale of the original property, the investor has a strict timeframe of 45 calendar days to formally identify potential replacement properties. They must notify the QI in writing of the properties they intend to acquire.
• Following the identification, the investor has a total of 180 calendar days from the date of the original property's sale (or the due date for filing the tax return for the tax year in which the transfer occurred, whichever is earlier) to complete the purchase of at least one of the identified replacement properties.
• The Qualified Intermediary then uses the funds from the original sale to purchase the new property on behalf of the investor.

This structure provides investors with greater flexibility and time to locate and acquire suitable replacement properties, making it a popular strategy for deferring capital gains taxes on investment property sales.

Examples of Delayed Exchange in Practice:

• Commercial Real Estate Investor:

  Imagine Sarah, a commercial real estate investor, owns a small office building in a rapidly developing urban area. She receives an attractive offer from a developer to purchase her building. Sarah wants to sell and reinvest in a larger retail plaza in a different part of the city, but she hasn't found the perfect property yet. She engages a Qualified Intermediary. After selling her office building, the proceeds are held by the intermediary. Within 45 days, Sarah identifies three potential retail plazas that meet her investment criteria. She then has 180 days from the initial sale to successfully close on one of those plazas, with the intermediary facilitating the transfer of funds. This allows her to defer the capital gains tax she would have owed on the sale of the office building.

  This illustrates a delayed exchange because Sarah did not directly swap her office building for a retail plaza. Instead, she sold her property, used an intermediary to hold the funds, and then had a specific window to identify and acquire a new "like-kind" investment property, thereby deferring her tax liability.

• Agricultural Landowner:

  Consider David, a farmer who owns a large parcel of agricultural land that is becoming increasingly valuable for residential development. He decides to sell this land to a housing developer but wishes to reinvest the proceeds into more productive farmland in a neighboring county to expand his farming operations. He hasn't yet pinpointed the exact parcels he wants to buy. David sells his current farmland, and the sale proceeds are placed with a Qualified Intermediary. Within 45 days, David identifies two suitable tracts of farmland in the adjacent county. He then has 180 days to complete the purchase of one of these tracts through the intermediary, effectively deferring the capital gains tax on the sale of his original land.

  This example demonstrates a delayed exchange as David used an intermediary to manage the sale proceeds, providing him with the necessary time (45 days for identification, 180 days for acquisition) to find and purchase new agricultural land, which is considered "like-kind" property for tax deferral purposes.