by Attorney Karl M. Rice
Q. What if I change my mind? Can I "undo" an exchange?
A. Yes, if you act before the exchange is complete, and if the exchange is
structured correctly. But, you cannot generally undo the exchange once it is
complete. This is another reason why it is important to have sound advice from a
licensed professional before starting an exchange. Sometimes, a taxpayer who has
structured a transaction as an exchange discovers that it was a mistake and will
have bad tax consequences. If you use an attorney or an accountant from the
beginning to assist you, this will not happen very often, because an attorney or
accountant will examine your situation in advance before advising you to
structure your transaction as an exchange. Even then, however, things may change
and you may decide you do not want your transaction structured as an exchange.
During the exchange, a properly structured exchange can be defeated by the
taxpayer not doing the things required to make the exchange work. Thus, the
taxpayer can deliberately fail to identify replacement property before the 45
day identification period is up, or deliberately fail to acquire the replacement
property which has been identified. If the exchange has been properly
structured, it will fail at this point, any funds held in escrow or trust will
go back to the taxpayer, and the transaction can be treated as a purchase and
sale.
However, exchanges are not "elective," they are "mandatory." This means that if a transaction qualifies as an exchange, it must be reported as an exchange and treated as an exchange for tax purposes. The taxpayer may not elect to treat it as an ordinary purchase and sale. For this reason, once replacement property has been acquired, it is generally too late for the taxpayer to change his or her mind. Get sound advice from a licensed professional to make sure you make the right decision in advance!
Rice & Stallknecht, P.C. would be honored to assist you.
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