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J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return by J.K. Lasser Institute

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6.4 Time Limits and Security Arrangements for Deferred Exchanges

Assume you own property that has appreciated in value. You want to sell it and reinvest the proceeds in other property, but you would like to avoid having to pay tax on the appreciation. You can defer the tax on the gain if you are able to arrange an exchange for like-kind (6.1) property.

The problem is that it may be difficult to find a buyer who has property you want in exchange, and the time for closing the exchange is restricted. If IRS tests are met, intermediaries and security arrangements may be used without running afoul of constructive receipt rules that could trigger an immediate tax.

Deferred exchange distinguished from a reverse exchange.

A deferred exchange is one in which you first transfer investment or business property and then later receive like-kind investment or business property (6.1). If before you receive the replacement property you actually or constructively receive money or unlike property as full payment for the property you have transferred, the transaction will be treated as a sale rather than a deferred exchange. In that case, you must recognize gain (or loss) on the transaction even if you later receive like-kind replacement property. In determining whether you have received money or unlike property, you may take advantage of certain safe harbor security arrangements that allow you to ensure that the replacement property will be provided to you without jeopardizing like-kind exchange ...

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