1031 exchange - percentage ownernship identification?

Question

I will try to keep this short and to the point.

We sold a property and hired a QI to handle the 1031 exchange. Our Replacement Identification did not include a percentage ownership (it was/is assumed at 100%) and by the 200% rule we calculated values based on an expected 100% ownership. We were over 3 replacements and used a combination of market value, listing price, and county tax values for calculating our 200% threshold.

We are past the 45 day identification period. We are now (day 55, roughly) preparing to close on a replacement property that was properly IDed in a transaction (at 100% ownership) we didn't actually expect would transpire. (Let me just say It's a complex deal).

Here's the question. We have the capability (by Identified Replacement within the 200% and 45 day limits, funds available via QI, and ready, willing, and able seller) to close on another replacement property that was properly IDed BUT we would be a 100% owner of half the property (as 50/50 TIC owner with another unrelated party).

I can't find IRC documentation that this scenario isn't allowed, but I'd like to get input from subject matter experts.

In summary, we will have a TIC interest in a replacement property. We will be on the deed.

Bill Exeter · Answer

Hi @Chris Martin,

You have to be careful here.  The Federal code and regulations indicate that the identification must be unambiguous.  The question is what if you identify a specific percentage and acquire another/different percentage, or what if you just identify the property address, which would be assumed to be 100% of the property and then you acquire less than 100% of the property.  Have you acquired substantially the same as what you have identified?

We know that a 25% variance at the Federal level should be O.K. because there is an example in the Treasury Regulations that supports this.  What if the variance is greater than 25%?  Will the states allow the same 25% exception.

I am serving as an expert consultant for two clients who did a 1031 Exchange (with another QI) who just identified the property street address but acquired less than a 5% tenant-in-common interest in the property.  California has disqualified these two unrelated 1031 Exchanges under the position that they taxpayers identified 100% of the property, acquired substantially less than 100%, and therefore did not acquire substantially the same as what was identified.

Qualified Intermediaries should be discussing these issues with their clients when an identification of a fractional interest is contemplated.

Chris Martin · Answer

@Dave Foster thanks for your reply.

When I posted this yesterday, I had not yet talked to the QI about the specifics. It was late in the day and I couldn't get ahold of anyone.

Regarding "Unless you specified a purchase of a specific % interest (100% or 50%or any other %) then you fulfill the letter of the id list with your purchase of any interest in that property." That is what I was looking for. We have (the LLC that did the sale) put several offers out there, most of which were rejected and/or countered. Our offers presented total well over 150% of the sales $, and we expected some (or many) would not materialize. And if they do, we can bring in TIC partners within the 180 day window....

Dave Foster · Answer

@Chris Martin, I'm curious why the QI you hired hasn't weighed in on this.  They need to take ownership of the read on this as it is they who have to prepare the docs and release funds and are the custodian of the 45 day list.

Unless you specified a purchase of a specific % interest (100% or 50%or any other %) then you fulfill the letter of the id list with your purchase of any interest in that property.  A purchase of full interest was still under the 200% criteria.  Most 45 day lists will provide you the opportunity to identify fractional interests as this can be a benefit when breaking the 4 property identification.  In this case it appears you weren't afforded that opportunity which will actually work in your favor.  It would help if you had some documentation or correspondence indicating your thoughts to maybe purchase less than a 100% interest.  That would give you something to produce if you were ever audited and if your exchange was ever questioned.