Home Exchange Vacations – Managing the Risks

Home exchange or house swap holidays are a great way to enjoy a cheap and convenient vacation. They are available through hundreds of websites that have thousands of happy customers. For the uninitiated, however, house swapping with strangers arranged over the internet might bring worries about thefts, damage, insurance, even squatters! However, most house exchange companies will tell you (probably quite truthfully) that any such problems are extremely rare. This is because anyone who joins a house exchange scheme should in theory be like-minded as they are offering their properties to strangers as well.

Choosing the right website/company

This is not usually a problem as the workings of house swap holidays are fairly straightforward thus reducing the chances of encountering an inefficient business. You can reduce the risk by opting for an established company which has a large number of listings but you shouldn’t ignore smaller operations which might suit your needs better. A larger company will not offer you any more legal or contractual cover (as explained below). Some house exchange sites indicate how many successful swaps members have undertaken and this could give some extra peace of mind if your swappers were experienced (and therefore there were no previous problems with them).

Legal issues regarding problems

Ultimately all house exchange companies whether they have thousands of listings or whether they just started up yesterday, will get you to sign some kind of agreement to their ‘Terms & Conditions’ or acceptance of liability. Some companies have contracts for you to sign when you engage in a house exchange but a lawyer will tell you that they are just a promise of good-will rather than any legally binding document. This acceptance of liability should not put you off as again, you are dealing with people in the same position as you who should be very unlikely to cause problems. In the worst case scenario you would be able to take legal action against the individuals that caused the problem (but not the house exchange business).

Insurance issues

Most house exchange systems, whether involving a direct swap or ‘non-simultaneous’ exchanges, do not earn the owner of a property any money for having people stay in their house. This reduces insurance problems immediately and prevents further problems with subletting and income tax etc. As the people staying in your home are invited guests then your Contents Policy should cover you for accidental breakages, losses and other damage. Of course you should check your policy carefully in case there is an issue with those people not being known to you. A house exchange network with just your extended friends does avoid this risk.

House guest’s standards

Not very serious but probably the most common problem with house exchange holidays is miscommunication and misunderstandings about laundry, replacing food and cleaning etc. Despite this article doing its best to put your mind at rest claiming that all house swappers are of the same mind as you, we of course all have different standards and habits! This risk of problems can easily be managed by establishing clear communication and understanding, prior to any house exchange situation. Most companies will have good guide sheets and checklists for you to complete and leave for your guests.

Paying your money but not being able to swap

Companies work with different systems (see my Ezine article “House Exchange Holidays – A Beginner’s Basic Guide”) but there is a risk that you could pay your joining fee and then not be able to arrange a suitable holiday. If the site runs a direct swap system then holidays are difficult to coordinate with your perfect dates and destinations etc. However, if there is just a one-off joining fee then you could view this as a long-term investment that doesn’t cost you anything extra until you manage to arrange that cheap holiday. Check the property listings before joining if that is possible as this might give you some indication of how successful you might be in arranging your desired vacation. Some house exchange websites use a non-simultaneous exchange where you choose from a database of properties and book to stay in one when it is available. This is easier to coordinate and organize as there is no direct swap involved, but it means that you have to be confident in your ability to offer an empty property at a certain time, irrespective of whether you manage to arrange your exchange holiday during the same period or not. This typically suits people offering a second home or holiday property that is empty. If you can be flexible and don’t have specific and urgent holiday requirements then most companies have something to offer you. You don’t have much to lose by joining up and you can even become a member of multiple websites to improve your chances of success.

Last minute problems as you set off!

A remote risk is having set up a house exchange which involves flights, amongst other arrangements, and for there to be an unexpected problem beyond the control of the respective party. No guarantees can be given by anyone involved beforehand but again remember that everyone in the scheme is in the same position as you and would hopefully do everything possible to resolve the issue. Good travel insurance will provide a financial safety net. Also a non-simultaneous scheme does reduce this risk as the properties are more likely to be second homes which are empty rather than a full-time family home.

The risks are real but serious problems are very unlikely and these are similar to problems you might encounter if you booked a more conventional holiday or even if you stayed at home!

The rewards of house swap holidays of course, far out-weigh the risks outlined above i.e. extremely low-cost vacations, the comforts and facilities of a home, a more authentic experience of a location etc.

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Foreign Currency Loans Embed an Exchange Rate Risk: The Case of SWISS FRANC Loans

Loans and mortgages in SWISS FRANC became popular in Cyprus after 2006, the year when the Republic was a candidate country to assess the EURO zone. During this particular period, SWISS FRANC loans were attractive because the cost of borrowing was relatively low. Notably, within the period 2006-2009, thousands of investors took loans in SWISS FRANC. Nevertheless, the sudden appreciation of SWISS FRANC towards EURO worsened the position of those investors and caused outstanding losses to borrowers and banking institutions.

Financial and banking institutions should shape their decisions and actions by taking into account the exchange rate fluctuations. Apart from risk assessment, banks are required to inform customers and investors adequately regarding the risks they may face once they decided to take a loan in a foreign currency. Banking and financial institutions are required to consider customers’ ability to comprehend and deal with risks related to exchange rate fluctuations. In addition to this, banks are obliged to warn the customers about potential risks that may emerge. That is to say, the banking institutions must have a transparent approach towards foreign currency loans and provide a detailed information to their customers.

As mentioned above, borrowing in foreign currency is risky because of exchange rate fluctuations which causes fluctuations in the capital itself that the borrower must pay back. Since borrowing in foreign currency embeds a considerable risk Cyprus banking institutions have initially distanced from these kinds of loans. Nonetheless, Cyprus banking and financial institutions have not estimated the complex nature of foreign currency loans and based their actions on the available information they had at a particular period.

The sudden appreciation of SWISS FRANC towards EURO increased the cost of borrowing. Consequently, it created problems regarding the repayment of SWISS FRANC loans. The latter caused considerable losses for banking institutions and consumers. On the one hand, the restructuring of non-performing loans becomes more challenging. On the other hand, consumers encounter serious difficulties to pay back their loans.

In October 2015, rating agency MOODY’S warned that the forced conversion of SWISS FRANC loans and mortgages would cost the banking institutions €250 million and will create ‘moral hazard’. New Cyprus Central Bank’s data demonstrate that non-performing loans are still increasing in banks’ balance sheets. Currently, there are court cases against Cyprus banking and financial institutions that promoted SWISS FRANC loans but have not informed and protected borrowers from the risk of exchange rate hit.


The majority of SWISS FRANC loans were granted by the Bank of Cyprus and Alpha Bank. Elena Gregoriades, a representative of the Central Bank of Cyprus, maintained that according to Central Bank’s data, the total SWISS FRANC loans granted for the purchase of real estate are estimated to €1.05 billion and affected 3000 accounts. Mrs Gregoriades articulated that a consumer who borrowed in SWISS FRANC in the period 2008-2010 suffered a loss of 30%-40% at the current exchange rate.

Approximately 11.000 borrowers have been affected by the inflation of their loans as a result of SWISS FRANC appreciation towards EURO. Currently, the exchange rate between EURO and SWISS FRANC is 1/1.1. However, most of the consumers borrowed when the exchange rate EURO/SWISS FRANC was more than 1.6. The augmentation of repayment cost and losses are highly associated with the transparency of Cyprus banking institutions concerning the high-quality information about the embedded risks.

It should be pointed out that the European Court rules in favour of the borrowers regarding cases related to foreign exchange loans. The court cases emphasize that European consumers and investors are protected against unclear selling practices in which banking institutions were engaged. In other words, the legislation protects consumers from misinformation and enhances the transparency of banking and financial institutions.

Recently, a historic court decision in Athens judged the loans in SWISS FRANC as non-valid and asked the banks to pay the full extent of the damage caused by a foreign currency hit. Specifically, the loan agreement between the borrowers and the Millennium Bank was judged as invalid. Moreover, the Court judged that the borrowers were not able to assess the risks related to foreign currency loans so the bank should have provided the necessary information and support. The decision of the court ordered the borrowers to pay back SWISS FRANC loans at the exchange rate that applied when the loan was granted and not at the current exchange rate.

The billion euro damage and the regulatory framework urged borrowers to submit lawsuits against certain Cyprus financial and banking institutions. Several Cypriot borrowers or foreign residents of the Republic of Cyprus proceed to legal actions against financial and banking institutions in Cyprus that promoted SWISS FRANC loans without the necessary information concerning the risks they may face.


Following the ongoing developments, banking and financial institutions are elaborating new and improved plans for the regulation and repayment of SWISS FRANC loans. A representative of the Central Bank of Cyprus asserted that banks agreed to submit revised plans, taking into consideration the interest rate difference, the benefit of the borrower, the amount borrowed and the date of the loan agreement. In addition, banks should provide borrowers with good repayment plans and lower interest rate. However, it should be underlined that the Central Bank of Cyprus cannot proceed to further actions since issues related to systemic banks need the approval of the European Central Bank.


The Limitation Law 66 (1) 2012 sets time limits on which the one party should bring a claim or give notice of a claim to the other party. When the limitation period expires, a party is prohibited from initiating a claim against another party. The law provisions consider different limitation periods according to the nature of the actionable right.

Given that the Limitation Law 66 (1) 2012 expires on 31st December 2015, it means that borrowers who wish to bring a claim against banking institutions within the six-year limitation period, do not have enough time. In other words, borrowers who wish to bring a claim against banking institutions will have to proceed with the necessary procedures by 31st December 2015, unless the Cyprus government proceeds to further extension.


As it was analysed before, foreign currency loans and mortgages require proper risk assessment and detailed information. Given the complexity of this particular topic borrowers and investors should seek financial and legal assistance from experts. In the case that banking and financial institutions have not provided borrowers with the adequate support then the borrowers should seek legal guidance regarding the legal actions they will proceed.

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The Final Chapter: Who Is Obligated to Exchange Their EU Driver’s License for a Spanish One?

Right, so this issue has been talked about extensively, debated, caused arguments, tears, frustration and near bloody murder. Instead of spending my time off over Christmas and New Year’s relaxing, I have been reading and re-reading legislation, articles, documents and making further personal enquiries because for the majority, this law makes zero sense and nobody until now has really been able to explain it clearly in a way that can be properly understood (myself included!).

The big question is: Who is obligated to exchange their EU driving license for a Spanish one and why? I hope that by the end of what I hope to be the final and definitive article on this matter, we can lay it to rest for good. Please note that throughout this post, I am only referring to EU licenses as non-EU must follow a different procedure.

First of all, why has this created so much conflict? Well, the law was initially drafted quite ambiguously that left certain aspects open to interpretation and of course, everybody has interpreted it in their own way so there was no cohesiveness at all in national media and even within the Tráfico Administration. Different versions have appeared since 2013 on Tráfico’s website to explain how this law should be understood and this has led to much misinterpretation, Chinese whispers and total chaos. As I said before, I read through the law at the time and had a number of questions about the way it was drafted so I went directly to source at Fuerteventura’s Tráfico office as well as the Madrid Central Office to try to clarify those doubts. The explanations received were inconclusive on many aspects as far as I was concerned and varied depending on who I spoke to. Then there would be moments when one interpretation would appear to make sense but that would change as I reviewed other elements that did not coincide 100% with that particular interpretation but since this has created yet another frenzy, I wanted to get to the bottom of how this law should really be interpreted so, let’s get on with it now and break the law down into bite size pieces and pray that I am able to explain it well because God strike me down if this has to be amended later on especially since I am going to have to retract something I wrote only a month ago!

The Beginning: The Decree that Started It All

Real Decreto 818/2009, de 8 de mayo, published in BOE (State Bulletin) number 138, 8th June 2009. This decree was first published in 2009 and unbelievable as it sounds, here we are still debating it almost seven years later, not that we are the only ones. The whole point of this law is to bring commonality to all EU issued driver’s licenses as well as mutually accepting the validity of licenses issued in other member countries throughout the EU. You could say it really started back in July 2006 when the point system was first introduced in Spain to fall in line with the rest of Europe (I personally remember it as the year Spain wept). If at that time you had a driving license for more than three years, you were awarded 12 points but if you had had it for less than that, you were only awarded 8. Depending on the type of infraction committed, the police can deduct 2, 3, 4 or 6 points at a time and obviously the loss of all points means losing your license.

There were considerable differences throughout the EU as some countries countries issued licenses that expire after 10 years as is the case in Spain but others did not have an expiry date at all or it was set at 15 years. Besides that, they wanted to establish the same validity for each class of license, a standard plastic card license as opposed to the paper variety and set up a common registry to facilitate an exchange of information on the status of each license between countries.

a) Established expiry dates according to license type:

Chapter I, article 12 determines -

Permits BTP, C1, C1 + E, C, C + E, D1, D1 + E, D y D + E are valid for a 5 year period until the holder reaches 65 years of age. From that time, the permits are only valid for a 3 year period.

All other types regardless of their class are valid for a 10 year period until the holder reaches 65 years of age, from which the permits are to be renewed every 5 years.

The above-mentioned validities may be reduced if upon issue or renewal, it is determined that the holder suffers from an illness or deficiency that may not necessarily impede them from driving at that moment but is susceptible to worsen in time.

b) Validity of EU issued licenses in Spain:

Chapter II states -

Driver’s licenses issued by any EU member country maintain their validity in Spain under the conditions in which they were issued in their place of origin unless the minimum age does not correspond to the minimum age required in Spain.

Licenses issued by member countries that have been restricted, suspended or remanded by any EU country or even Spain, will not be considered valid for use in Spain.

Nor will those licenses issued in any EU country be valid if the holder is also in possession of a license issued by a different EU country that had been withheld, suspended, declared null and void, damaging or deemed invalid in Spain.

The holder of a license issued in one of those member countries that has established permanent residence in Spain will be subject to Spanish legislation regarding its duration, the holder’s mental and physical capabilities as well as application of the point system.

Now comes the key point: “When it comes to licenses that are not subject to a determined expiry date, it’s holder should proceed to renew said license TWO YEARS after they establish their permanent residence in Spain with the object of applying the expiry dates detailed in article 12.”

The law states that if your EU license does not establish a set expiry date, you are obligated to renew it two years after obtaining residency in Spain. This raised a whole new set of issues at Tráfico because some of their civil servants interpret the term “permanent residence” as 6 months after the date shown on the green residency card whereas others accept the actual residency card as sufficient proof of their status in Spain regardless of its issue date. The correct interpretation of the is actually 6 months after the issue date indicated on the card for purposes of this particular decree.

If you remember, this was a hot topic back in 2013 because from that year all EU licenses had to conform to the same standard so the rumour mill went into overdrive and the belief was that all foreigners had to exchange their licenses when it reality it meant that any foreigners with legal residence in Spain on or before 19/01/2013 with an EU license that did not have an expiry date or one superior to 15 years had to exchange them and the rest who obtained residency after that date had to exchange their licenses once the two years were up so another date was set, the famous 19/01/2015.

I mentioned before that if the holder establishes their permanent residence in Spain, they are subject to Spanish law. How? According to article 16 of the decree -

… these can voluntarily apply for the details of their license to be officially recorded in the Drivers and Offenders Registry at Tráfico

This article created even further confusion because even though it sounds clear, it again gave cause for open interpretation as some of Tráfico’s civil servants and other professionals understood that once a holder of an EU driving license becomes a resident in Spain, they are obligated to exchange their permit because they are subject to Spanish law from that moment on and had to come under the national point system whereas others understood that because the holder is subject to Spanish law, they are only obligated to register their current license in the Drivers and Offenders Registry. Even this last point poses an issue because, one article clearly states that residents are subject to Spanish law and a latter article indicates that registry is optional so some say it is not necessary and others say it is obligatory.

c) Exchanging the permit for an equivalent Spanish version -

Article 18 indicates:

The holder of an in-date permit issued by any EU country and who has established their permanent residence in Spain, may request at any time, the exchange of said license for a Spanish equivalent
The word “may” is very telling as it indicates there is a choice and not an obligation no matter how officials may interpret this law, however, a debate arises once again because some Tráfico offices will accept the residency card as sufficient proof whereas the Tráfico office in Fuerteventura will only accept the application if 6 months have passed from the issue date shown on the residency card. Once the application has been received, Tráfico officials contact the country that issued the license to ensure its authenticity and validity and from there may accept or reject the application. The outcome of the checks that are carried out is recorded in the Drivers and Offenders Registry

Article 19 continues -

Tráfico has the right to obligate a holder to obtain a Spanish license if:

As a result of applying Spanish legislation, it may be necessary to impose modifications, restrictions or other limitations to people or vehicles.

If the holder has been sanctioned administratively for offenses punishable by the loss of points and in order to apply the full weight of Spanish law with regards to restriction, suspension, withdrawal or the lapsing of the drivers license.

When it is necessary to declare the nullity or harmfulness of the license in question.

In order for officials to enforce this article, the holder must have established their permanent residence in Spain and again, the resolution of the file would be recorded in the Drivers and Offenders Registry.

I obtained the following information of interest from the National Police Forum:

“From the date in which an EU holder of a drivers license resides in Spain and whilst he resides in Spain, any renewals or issue of new permits must compulsorily be done in Spain. In the event a license is renewed in the holder’s country of origin whilst having Spanish residency, the license would be valid in any other country EXCEPT Spain, where the permit would be considered illegal and any applications to exchange it at a later date would not be accepted. If traffic violations were committed in Spain that result in the loss of points or the temporary withdrawal of said license, he would be obligated to handover the original license and a Spanish one would be issued with the corresponding points taken off. From that point on, if the holder does not exchange or apply for a duplicate license in their country of origin they should be made aware that their permit would be considered illegal in Spain with all the penalties that apply if the anomaly were detected.”

From there, the rumour mill began about 1st January 2016 being the cut-off point for all foreign residents to exchange their permits or risk being fined and after enquiring, this seemed to be the case, however, I did not find any legal basis for this procedure within the decree of 2009 so I began to look elsewhere. After further research, a lot of patience, tired computer eyes, and a million cups of tea (I’m sure some glasses of wine were thrown into the mix too), I did manage to find an obscure report issued by Tráfico and that amazingly dated back to 9th March 2015 (the report has been attached) that completely confirmed my initial interpretation of the law:

“The European Commission has requested that all member States show flexibility in the implementation of this new regulation since the main objective is the administrative legalization of EU driving permits. Since there are a considerable number of citizens residing in Spain who must comply and renew their permits, said flexibility must be accompanied by a strong campaign in which EU residents in our country are advised of their obligations. For this reason, fines for driving on a EU license without having renewed it after the two year residency period in our country cannot be carried out automatically, rather it must be done in a way the citizens who are affected by this change are advised of new regulations and have a reasonable period of time in which to legalize their situation. For this reason, we deem it necessary to establish a transitory period in which holders of EU permits may familiarize themselves with the procedures they must carry out in order to renew said permits. It has been established that until 1st January 2016, it does not proceed to denounce or sanction this situation, a time period that we consider sufficient and reasonable to renew permits at Tráfico offices.”

How are the Guardia Civil and Police Officers to proceed? The report continues to say:

“It is significant to point out the principle that all EU licenses are valid for the holder to drive in Spain as long as these have been issued by the corresponding authorities of each Member State… When agents in the carrying out of their duties detect that a EU driver is a registered resident in Spain, they must also check the expiry date of their license, paying special attention to the following two scenarios: (a) if the permit has already expired or (b) if the permit does not have an expiry date or if the indicated date is more than 15 years for permits AM, A1, A2, A, B and BE or an indefinite validity or expiry date of more than 5 years for permits BTP, C1, C1E, C, CE, D1, D1E, D and DE. In both cases, the agent will give the driver an informative document with all the information pertaining to the renewal of their permit. A fine will not be issued, rather, the driver’s details must be noted down on a document, advising the driver that if after 6 months or from 1st January 2016, they are caught again in the same circumstances and has not proceeded to renew the permit, they will fined 200 euros. If there is any doubt regarding the driver’s residency status in Spain, this document must be filled out and forwarded to Tráfico where the necessary checks will be carried out to determine their status. All documents filled in by the agents will be recorded on the driver’s file at Tráfico along with the date so that if they are intercepted at a later date, the proper fine can be issued. The agents cannot issue any type of fine if they observe that the driver has already requested an appointment at Tráfico in order to legalize their situation.”

The Dreaded Medical Examination and Finalizing the Application at Tráfico

To exchange your drivers license for the Spanish equivalent, you must pass a medical examination that can only be performed by official centres, “Centros de reconocimiento médico de conductores”. The type of examination can vary depending on the applicant as well as the type of license they hold but in most cases the exam is not extensive at all and comprises of a hand-eye coordination test, an eye test followed by a brief chat with the overseeing doctor. If necessary, they will carry out further tests to verify audiological, respiratory, cardiovascular and renal systems and if the tests are positive, they will stamp the certificate and forward the file directly to Tráfico to confirm the applicant is eligible to drive (this is unless the entire I.T. system between the medical centre and Tráfico completely collapses as it did the other day!). From there, you need to go to Tráfico to complete the process and they will confirm whether the Spanish license will be issued pending confirmation from the country that issued the current license.

In short, if your license complies to current EU legislation and has an expiry date inferior to 15 years, you are not under any obligation, at least not at this moment in time to exchange it for a Spanish license. Due to mounting fears and skepticism of local law enforcement, many have opted to exchange their licenses anyway for a simpler life and they are not wrong to do so at all. For some it was an easy decision because they no longer have ties to the issuing country and are permanent residents here so it made sense to just obtain a Spanish license anyway but others prefer to retain their own country’s license for as long as they possibly can.

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Tax Deferred Exchanges of Investment and Business Real Estate

The Primary Residence taxation, the Residential Replacement Rollover, Sec. 1034 exception is gone. Previous capital losses still apply, if the property is held as investment property and sold at a loss and that loss can be carried over for up to 7 years. For those over age 55 the primary residence or residential sale exclusion of taxation is gone. Tax deferred exchanges remain a viable way of deferring taxation on investment real estate.

It is required to analyze and pre plan prior to transaction. That analysis must be done by an updated tax deferred exchange professional such as those we have on retainer. Not only do you need a tax attorney, but a real estate attorney, and an expert attorney working with them – that is a specialist in only tax consequences; especially those of tax deferred real estate transactions. There must be proper forms and written documents before the transaction is done. This requires planning and a review of limitations as well as a formal and professional critique of assumptions and decisions.

Most Realtors, Attorneys and CPAs do not have sufficient expertise to guide you in a legitimate and defensible tax deferred exchange. The key here is defensible, as the IRS will usually audit the tax deferred transaction and if it’s done correctly so that it is easily defensible you will sail right through the audit for little or no money. Your personal tax profile and that of your other business and family identities must be factored in the decisions. It may be necessary to legally refigure, adjust, and compartmentalize your purchase or sale – and document that appropriately, BEFORE you begin to put any part of the transaction in writing. Planning is legally done BEFORE and if it is done after the transaction you can be liable for fraud. The IRS does not take kindly to fraud especially regarding real estate.

For instance you must know your straight line depreciation factor; for investment property that is currently 39 years. For instance: Any depreciation taken during the ownership of the property will be picked up in a recapture tax upon the sale of the property.

Federal and State taxations must be combined properly, according to numerous factors that must be researched by your team of advisors. Since the total taxation on the gain is approximately 35% of the gain plus the recapture tax – your fees to professionals can be well worth it to you if they better your tax situation. The tax deferred technique can defer till later or eliminate your tax payment and consequence. Of course the only real and usual way to eliminate the tax is to die. There are ways to defer the tax however until that death. Tax deferred strategies are sometimes called alternative strategies or alternative tax deferment strategies.

Note: if you are speaking with anyone and they speak of TAX FREE EXCHANGE or TAX FREE SALE of your property, they are not well informed and thus you should be wary of any other advice they give you. There is, effectively, no such thing as a tax free sale or tax free exchange of real estate.

Exchanging is an effective tax planning tool. Large potential tax liability can therefore be deferred. And, there are savvy investors who have deferred taxation on millions of dollars of properties for decades and thus given themselves many millions of dollars of additional investment money with which to leverage their wealth.

Like kind exchange can now be defined as: any kind of real estate in exchange for any other kind of real estate.

We hear of qualifying property or properties – yes there can be more than two properties involved, in some cases there can be several and you don’t have to ever see or even know about the other properties involved. You will need good advice however, professional advice. This exchange of any kind of real estate for any other kind of real estate was not always true. This tax deferment alternative is not for everyone. Some owners should not defer.

We must realize, as well, that there is ALWAYS a risk of audit. The larger the dollars involved and the more suspect (according to the IRS) that the participants in the transaction are, the more likely an IRS audit of the procedure is. If there are several million dollars in tax deferment involved, and especially if one or more of the participants are considered audit targets by the IRS for any reason, you may become involved in an expensive tax audit. The cost of the audit, even if you are successful in defending your decisions, can be far greater than the tax deferments. And if the deferment is disallowed there WILL be penalties, fines, interest and even more substantial legal and accounting fees – plus an amended return in some cases which may trigger more consequences and even more audits. I hope I’ve made myself quite plain here – get good advice from legal and accounting specialists on these exchanges.

There is a time line, for several of the acts and consequences in exchanges according to the IRS. In addition to timing there are other qualifying or disqualifying situations and these situations include the use of the properties, before, during and after the transaction by those involved or their families, friends, associates, etc… In addition to the normal criteria for the exchanges, if Realtors, investors, attorneys, or those who buy and sell real estate frequently are involved in exchanges; the IRS makes special, more restrictive rules that will result in more scrutiny by the IRS. In fact the IRS can make up reasons why they think a person needs more scrutiny; that can include political affiliations, relationships to politicians, your social position, your affiliation with judges, and conspicuously wealthy or well known people and even your religious affiliations and charitable giving recipients. In fact, there can be a tax deferred exchange that will work for one side of the exchange and not for the other person or entity involved.

In addition the tax court looks at intent for use, investment, or purchase and sale — not only the use; past, present and future; of the properties involved but what they think may be or could be the uses and consequences based on all sorts of criteria and even hunches they may have. They also have extensive rules on what like-kind exchanges are. The exchange must also be interdependent. There may not be any receipt or control of cash or other liquid assets from the sale by any of the exchangers. This can be inclusive of debt relief as well. Any of these things will be taxed. In fact, a refinancing of any property involved within two years or less will disallow the tax deferment as well. There are also several time limits and timing criteria involved which must be allowed for and honored.

There are some specific terms; relinquished property and replacement property are the most important terms; after the most important definitive phrase of all: Like Kind Property Exchange. Large potential tax liability can be deferred; that is: NO tax is due upon receipt of the proceeds; from your investment in qualifying real estate, whether buying or selling, can be maximized by deferring the tax liability, the consequences, and using the deferred expenses. That is; you are saving and have the use of the tax money you don’t have to pay now, and you can invest that money in the next property, giving you a multiplied ability to invest and reap further benefits of appreciation and income. Therefore, you will have the additional money, and therefore additional down payment, to invest in an even larger property or pay cash for a more expensive property. This can change your life; your life as an investor, your business life, at least.

The exchange does not have to be simultaneous. You must in general; identify the property within 45 days and settle within 180 days.

There are also delayed exchanges, non simultaneous exchanges, which are sometimes called Starker Exchanges. There can be a buyer assisted, delayed, Starker exchange. This buyer assisted, delayed exchange, is done with the help of the buyer – by letting the buyer possess or even live in the property for a while. This is almost always a bad idea, a very bad idea. There is also such a thing as a reverse-Starker exchange. In a Reverse Starker Exchange the replacement property is acquired before the relinquished property is sold. These are rare, unusual, possible and legal – but not to be considered lightly without adequate counsel involved in your every planning facet.

For the protection of all involved; the contracts, all exchange documents and paperwork should be prepared by specialists in tax deferred transactions. The Realtor should never, ever, prepare the exchange documents!

There are some additional factors and rules. You can name up to three possible properties in that first 45 day period. There is also a rule called the 200% aggregate rule where you can name several
properties up to but not more than 200% of the value of the relinquished property. Property held by a person who deals in property does not qualify. Personal residential use property does not qualify. Partnership interest in property does not qualify. Refinanced property will not likely qualify if it has been refinanced in the last two years. The property must ordinarily be held for investment and generally acquired and held for appreciation and for production of income such as rental income.

Let’s now look at the sale of personal residences. The gain on a personal residence has no tax due on the first $250,000 of gain for one person or $500,000 tax relief for a couple. A principle residence is one that a person resides in for 183 days per year or more and no other. Factors which determine a person’s principle residence are four; each showing the same residential address of that being claimed: A Driver’s License; Magazine, Newspaper, and Internet Subscriptions, Utility Bills such as Cable TV, Telephone, etc. that are mailed to and show the address as residence, credit card bills, checking and savings accounts, voter registration card, personal telephone listing in the white pages.

There are many pages of rules, regulations, code, determinations, tax code, rental and vacancy rules, abandonment according to prescription, determinations of intent, various capricious factors known only to particular IRS agents, time lines, divorce issues, temporary use, rental, vacancy, or abandonment issues, documented or discoverable intentions on the part of participants in the transactions, multiple dispositions in short periods of time, work related occupancy and vacancy requirements, personal business use of property, income streams, family uses, health related and documented residential move or vacancy requirements, court cases and other recorded facts, all manner of special requirements and issues, land installment contract provisions, miscellaneous extenuating and defensible contingencies – which will affect the bona fide legality and defensibility of a tax deferred transaction. There are many points upon which your planning should be based. There are some emergency planning techniques as well.

You can even take some improvement expenses and take a fix up expense for work done to sell the house. You MUST have: Written affirmation of necessary expenses that are needed to sell the property. Be able to prove the work was done within 90 days of the executed contract of sale. There is also, now, a maximum of 20% taxation on the taxable portion of the net gain on the home. Generally tax laws are applied separately to each individual owner or co-owner of the property and each must meet requirements separately and individually.

Take care. Be prepared. Educate yourself and ensure that your advisors are as well. Be legally and financially, well represented and very professionally and personally wary.


End Note: The above article was written in the form of notes during a class I attended on exchanges that was delivered by SEVERAL full time professionals in the business of ONLY these types of exchanges. These notes are to be considered guidance in the form of alarming you to the point of getting proper counsel only. You may know the exchanges of Real Estate as Starker Exchanges, 1031 or 10-31 exchanges or even as “tax free” exchanges. They are NOT tax free, they are tax deferred! Be careful.

Do not use the information in this article to make your final tax or selling or buying decisions. This information here is to give you enough data to begin thinking about deferred tax – exchange of real estate.

Do not make any decisions or write any documents based on this information. Get specialized legal advice from experts in this exact business; not from unspecialized attorneys or accountants – and especially NOT from general Realtors such as myself.

Ask to see the credentials of anyone who seeks to advise you, they will have them or not, exact and specific credentials, in writing, of their professional ability to serve you. If not, chose another professional to help you. In fact feel free to contact me and I’ll get you in touch with those senior professionals who are full time in this exact profession.

There are law changes frequently on these forms of transactions and as I write this 10-31-2001 there are several laws being discussed and perhaps voted on today that will change many of the factors involved here – hopefully for the best – in order to help bolster our economy even more and support the real estate business in which I work.

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