1031 Exchanges & Trusts

Trusts are frequently used with Internal Revenue Code section 1031 exchanges. Relinquished property could be held in revocable living trust that was initially created for estate planning property purposes, or the replacement property could have an interest in a Delaware statutory trust or an Illinois land trust depending on where you live. All of these trusts have different purposes but they all share some common characteristics and rules. Read on to learn more about how a trust can impact a 1031 exchange.

General Trust Concepts

A trust has three different parties; the beneficiary, the trustee and the guarantor. The guarantor is the one forming the trust. Usually he’s part of a written trust agreement and he/she uses this to transfer property to the trustee. The trustee holds the legal title on that property for the benefit of the beneficiaries in the trust. And a trust may or may not be a regarded entity for the purposes of taxes. One of the most common questions both by a qualified intermediary in this type of exchange has to do with who is the taxpayer during an exchange. Although the trustee holds the legal title for the property, the beneficiaries also hold an interest in the property in general. Although these are generally excluded under exchanges of IRC section 1031. As a result there are only two possible answers.

If the trust is irrevocable and there are no other powers being obtained by the guarantor, then the trust is the taxpayer during an exchange; or if the trust is instead a guarantor trust then the guarantor is the taxpayer during the exchange. These are the only two possibilities but they may be addressed or asked about why the qualified intermediary. The taxpayer has to either be the guarantor or the trust itself and not the trustee or the beneficiaries. As always, before engaging in a 1031 exchange you should do your due diligence and consult with an experienced qualified intermediary who can advise you about the process and answer your questions upfront. Having a qualified intermediary you can trust makes the process easier and also gives you confidence in the process moving forward. Make sure to tap and vet your qualified intermediary sooner rather than later.