Gifting/Grant Deed post 1031 exchange

[Hoa Morales-Phan]

My mom's sister wants to do a 1031 exchange. Vacant commercial zoned lot (unimproved) to a SFR as a rental property. Can she gift it after the exchange to the SFR to say me or my brother? What tax implications would we run into? What is the safest way to go about this? The commercial lot has been held as an investment holding for tax purposes.

[Ashish Acharya]

Originally posted by @Hoa Morales-Phan:

My mom's sister wants to do a 1031 exchange. Vacant commercial zoned lot (unimproved) to a SFR as a rental property. Can she gift it after the exchange to the SFR to say me or my brother? What tax implications would we run into? What is the safest way to go about this? The commercial lot has been held as an investment holding for tax purposes.

You must continue to hold the property they receive in a like-kind exchange for productive use following the exchange. Although no specific time frame satisfies this requirement, transferring properties immediately or shortly after receipt may disqualify the like-kind exchange. For example, in Rev. Rul. 75-292, the IRS held that when an individual received real property in a like-kind exchange and immediately transferred it to a corporation in a tax-free Section 351 exchange, the like-kind exchange failed to qualify for Section 1031 treatment. The IRS said that the individual did not hold the replacement real property for productive use.

There is no clear-cut rule on how much time a taxpayer must hold the property for the IRS to consider the taxpayer to be holding the property for productive use. The authors believe that one year is probably a safe period, six months is risky, three months is very risky, and anything less is likely to be challenged, unless there are extenuating circumstances.

If you plan to make post-exchange transfers of property received in a like-kind exchange, you should consider allowing sufficient time between the exchange and any subsequent transfer to meet the requisite held for criteria.

Maybe your mom's sister should consider transferring the property to you first before the exchange and letting that you make the exchange.