Extensibility

Extensibility has to do with provisions that can be made in case an exchange is about to fail.

Delayed exchange fail when deadlines are not met. Assuming that the 45-day deadline in a delayed exchange has been met but the 180-day deadline is quickly approaching, what can be done if properly identified New Property cannot be acquired? Virtually nothing is the unfortunate answer. In fact, the QI will return the Exchanger’s funds and the Exchanger will have a capital gain tax to pay because the Old property has already been sold.

Reverse exchanges fail when properly identified Old Property has not been sold within 180-days of the close of the New Property acquisition. If a reverse exchange is in danger of failure, it can be extended. The extension is accomplished by forming a properly capitalized and structured LLC acquire the Old Property before the 180-day exchange period expires. The initial reverse exchange is therefore finished and the Exchanger’s tax deferment strategy is successful. There is still an ongoing obligation for the Exchanger to find an ultimate buyer for the Old Property and consummate a sale. However, the extension provides significantly more time to accomplish the ultimate disposition of the Old property.

The complexity and cost of an extension of this nature is potentially significant. A detailed analysis of the cost and benefits is critical at the start of any discussion of this strategy. However, an extension option of this nature is simply not available with delayed exchanges. Exchangers who have significant tax deferral potential and concerns over the timing of the ultimate sale of the Old Property have an option that is potentially very valuable.

More on this extension structure and other non-safe-harbor structures is available here.