Chapter 13

Modern Finance

Learning Objectives

• Describe how a tax-deferred exchange and an installment sale agreement allow real estate investors to alter their portfolios without having the value reduced by tax payments

• List the property requirements for an exchange

• Describe how an installment allows the seller to defer payment of taxes on capital gains

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Tax-Deferred Exchange

• Investor exchanges one or more properties for another

• Requirements– Must be properties held for use in trade or business– Must be like-kind properties– The exchange must actually occur– The basis in the acquired property must be equal to

the basis in the relinquished property

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Exchange Con’t

• Exchanges can be three-party or delayed

• Boot is property in an exchange that is not like-kind

• Incidental property (e.g. furniture) may be involved in the exchange

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Technical Requirements

• Owner of relinquished property must identify the replacement property with 45 days

• Exchange must be completed within 180 days

• Owner of relinquished property must not be in construction receipt of the proceeds from the transfer

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Installment Sale Financing

• Seller takes back a promissory note from buyer

• To qualify, the seller must receive at least one payment after the year of sale

• Used to postpone taxes

• Used only when a capital gain results from sale

• Gross Profit Percentage is the portion of the taxable profit in each payment

• Related Persons RuleRelated Persons Rule

• Imputed Interest Rate RuleImputed Interest Rate Rule

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