THE OKLAHOMA BAR JOURNAL 44 | JUNE 2024 Statements or opinions expressed in the Oklahoma Bar Journal are those of the authors and do not necessarily reflect those of the Oklahoma Bar Association, its officers, Board of Governors, Board of Editors or staff. DEFERRED EXCHANGE GENERAL ORDER OF OPERATIONS Line up the QI and set terms for how funds will be held, managed and protected.8 Close on the relinquished sale and escrow sale proceeds with the QI. Do not allow the taxpayer entity to directly hold sale proceeds or the sale will be deemed a transfer without exchange. Use one of the three possible replacement property identification methods (three property rule, 200% rule or 95% rule), and formally identify the target replacement properties to the IRS within 45 days of the relinquished property closing.9 Contract to acquire the target replacement property(ies) and perform appropriate due diligence. Close the replacement property sale(s) using the QI-held funds, with additional funds or financing as necessary, within 180 days of the relinquished property closing.10 WHAT HAPPENS IF A 1031 EXCHANGE FAILS? There are two common exchange failures. First, capital gains tax may be assessed because the taxpayer is unable to meet exchange deadlines or fails to close on replacement properties. Second, a partial exchange can occur whereby a portion of relinquished property proceeds are not reinvested and are, therefore, subject to capital gains tax. TIPS FOR A SUCCESSFUL EXCHANGE Counsel can advise exchange clients to consider identifying potential replacement properties prior to selling the relinquished property. This can alleviate the crunch of a tight 45-day identification deadline. Parties can also consider using nonbinding letters of intent or inquiry letters to expedite the acquisition of a replacement property. There is no rule that an exchange must take the full 180 days. Be wary of new builds – construction delays may push a taxpayer beyond the 180-day deadline. Keep detailed information about each exchange to ensure a successful audit, including all material transaction documents and independent third-party valuations of each property. OTHER KEY RULES AND CONSIDERATIONS Replacement properties must be obtained in the same manner as the relinquished property. The same individual or legal entity (e.g., LLC, trust, etc.) must divest the relinquished property and acquire the replacement property.11 Replacement properties must be a like-kind property. This typically includes any property held for investment purposes or used for trade or business purposes. Real property located in the United States is not likekind with property located outside the United States.12 However, improved land and unimproved land may be like-kind.13 Taxpayers can exchange one property for multiple There are two common exchange failures. First, capital gains tax may be assessed because the taxpayer is unable to meet exchange deadlines or fails to close on replacement properties. Second, a partial exchange can occur whereby a portion of relinquished property proceeds are not reinvested and are, therefore, subject to capital gains tax.
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