Best way to get around short term capital gains

Member since 2024 · 1 post · 1 vote

I have a client that sold his land and would like to use his 1031 exchange to buy his mothers land. She bought it less than a year ago in September. Is there a way we can work around her paying capital gains?

1 Reply

17 views

Most Popular Reply

Brett SynickyPro Member

Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 498 votes

@Account Closed Mom would be a disqualified person on an SDIRA. That would not work.

2 Reply

See this reply in the discussion

5 Replies

Jump to latestLatest

Sort by

Account Closed
CPA · NY · Member since 2023 · 891 posts · 157 votes
2y
A 1031 exchange, also known as a like-kind exchange, allows taxpayers to defer capital gains taxes on the sale of certain types of property if they reinvest the proceeds into a similar type of property. However, there are specific rules and requirements that must be followed to qualify for this tax deferral.

In the situation you've described, your client wants to use a 1031 exchange to buy his mother's land. However, his mother purchased the land less than a year ago. This poses a challenge because one of the requirements for a 1031 exchange is that both the relinquished property (the property being sold) and the replacement property (the property being purchased) must be held for investment or used in a trade or business.

If your client's mother purchased the land less than a year ago, it's unlikely that it would qualify as replacement property for a 1031 exchange because it hasn't been held for investment or used in a trade or business for a sufficient amount of time.

However, there may be other options available to minimize the tax implications for your client and his mother:
1. Hold the Property Longer: If your client's mother holds onto the land for a longer period of time and can demonstrate that it is held for investment purposes, it may become eligible for a 1031 exchange in the future.
2. Consider Other Investment Properties: Your client could explore other investment properties that have been held for a longer period of time and would qualify as replacement property for a 1031 exchange.
0 Reply
Brett SynickyPro Member
Solo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 498 votes
2y
@Account Closed Mom would be a disqualified person on an SDIRA. That would not work.
2 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
2y
@Wylie Freeman, There's actually two different concerns here.
1. Completing the exchange buy purchasing his mother's land. The IRS as stated that an investor may not use a 1031 exchange to purchase property from a related party when the objective is primarily to avoid tax. So, while there is no statutory prohibition against it. It will always be more suspicious to the IRS. particularly if it is coupled with an extraordinary measure to help their mom avoid taxes. Many accountants will still approve such a transaction. But it has to be absolutely arms length. So any attempt to bargain sell to save taxes for the mom will result in a failed exchange if examined.
2. Mom's sale - Because of #1 this makes it tough to use intent as a reason to do a 1031 even though there has been a short holding period. It's not prohibited by statute. But you'll want the buy off from your accountant. Because they might feel there is strong enough evidence of intent for her to do her own 1031 exchange.
The 1031 Investor5137 Reviews
Website View Page
0 Reply
Sean RossPro Member
1031 Exchange Qualified Intermediary · Denver, CO · Member since 2017 · 174 posts · 97 votes
2y
@Wylie Freeman,

To piggyback on Dave's comment, it is possible for your client and his mother to hurdle over the IRS' objections and suspicions here by having the mother do her own 1031 exchange out of her land when she sells to her son. This validates both the son's 1031 exchange and helps mom defer paying taxes.
Of course, that means she'd have to turn around and buy something else. This very well might not fit in with her plans.
The next question here is: what does mom want to do with the money from sale? Does she need cash in hand or is she still OK investing in real estate?

[email protected]888-899-1031
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.