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Exchange Rules

December 24, 1989

Here's some important news regarding tax-deferred real estate exchanges that should interest many of your readers. Those who followed the progress of tax law changes this year know that last July the House of Representatives passed a bill to require that property transferred and property acquired in a "like-kind" property exchange under Section 1031 of the tax code must be "similar or related in service or use." This threatened to prevent swaps between different types of property.

But the day before Thanksgiving, Congress dropped the proposed restrictions and left the meaning of "like-kind" right where it's been for years. So virtually any type of real estate held for business use or investment can still be traded tax-free for any other real estate. In simple terms, you can still trade an investment condo for a shopping center or an office building for raw land, or apartments for an industrial building, or any other combination you can imagine.

Congress also left open the minimum holding time before property can be exchanged. The House had proposed a one-year minimum, but this too was dropped.

However, the new law has imposed tough new restrictions on exchanges involving "related persons," so readers should consult with their tax advisers to make sure they properly arrange their trades with an independent party to avoid this trap. Family members, trusts and related corporations are particularly dangerous trading partners now.

RICHARD L. SEVIN

Beverly Hills

Sevin is president of American Deferred Exchange Corp.

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