All Forum Posts by: Bernard Reisz

@Account Closed

To clarify and expand on the great info already provided on this thread:

• Technically, no property that is held primarily for sale is eligible for 1031 exchange treatment. Proving intent is very much a "facts and circumstances" matter, which means that there are no bright line rules and each scenario is independently evaluated. For certain scenarios there are either IRS safe harbors or "conventional wisdom" that advocate for holding periods of either 2 years or 1 year. 

• However, it's important to understand exactly how and when IRS safe harbors or the "conventional wisdom" apply. For a serial flipper that does not even attempt rent out a property 1031 is not a likely option - even if the property takes a while to sell.

Regarding a construction exchange, the rehab work with the exchange proceeds must "completed" before the taxpayer/exchanger takes title to property. Therefore, all such work is done while the exchange accommodation titleholder (EAT) holds title to the property.

@Natalie Kolodij Ownership changes on a replacement property subsequent to an exchange must be carefully navigated, as it can be asserted that the property was not held for investment at the the time of the exchange, but rather for resale.

@Remington Lyman Just reading your post and would point out the following, if you haven't closed yet.

At the risk of stating something that's obvious to you, you must initiate the 1031 exchange prior to closing of relinquished property sale. (The wording of your post sounds like doing a 1031 after the sale; I may be inferring to much, but I've encountered this misconception way too many times and would be glad to spare you from any tax surprises.)

1031 is intended for property held for investment, not property held for sale. Fixing-up a distressed property and then immediately selling is not an ideal fact pattern. 

@John Clien

If it's of any consolation... Although moving back into the property for 2 years will have some tax value, it would not get you back to having the full 250k/500k exclusion. Appreciation would be prorated to periods of qualified and non-qualified use and anything allocated to rental periods would reduce the exclusion amount.

@Carlos Ptriawan When doing an exchange - and aiming to keep it completely non-taxable - you may not "trade down" in either value or equity. So, in your replacement property you must get back up to both the FMV and equity of the relinquished property. The actual calculations can get quite nuanced, but the foregoing is an easy-to-use rule of thumb.

@Samantha Piccone

Based on what you're outlining, I'd recommend proceeding with insight from qualified advisors. 

The IRS has challenged similar arrangements in the past by asserting that a replacement property in a 1031 exchange that was either (a) subsequently gifted to a child or (b) rented to a child did not qualify as exchange property because it was not "held for investment." 

An IRS challenge does not necessarily translate into an IRS victory, but you must proceed carefully. Specifically, the rents you pay to your parents should be FM.

@Sharon Whipkey Probably helpful to understand what "identification" is about and its implications within a 1031.

The IRS has decided that any property not properly "identified" is treated as NON-like kind to the property that you are replacing. The IRS then imposed limitations on what's considered properly identified.

• Identify up to 3 properties, regardless of value.
• Identify unlimited number of properties, provided that their aggregate FMV - determined as of the end of the "identification period" - does not exceed 200% of the relinquished property (as of the date it was relinquished).
• If the 3-property and 200% rule are violated, property will still be treated as properly identified, and therefore of "like-kind" if:
  • The property was actually bought within the 45-day identification period, or
  • If identified property with FMV of 95% of all identified properties are actually bought within the exchange period.

To answer your questions:

1. If one of your identified properties does not close, the only implication is that you have fewer identified properties to which to apply your exchange proceeds. If you can still avoid trading down in value or equity, no tax.

2. Yes

3. You can identify more than you actually close on.

@Tom Beck The law allows you to structure your transactions any way you'd like. However, the tax treatment of a transaction does not necessarily follow its legal structure, but rather is based on its substance. Losses are recognized on sale, not on a gift. If I your dad gives you a $1,000,000 property in exchange for $1, what would you call it? (What would anyone else on this BP forum call it?)

FYI, losses on sales to related persons are also suspended. 

@Tom Beck Should be emphasized that a loss could not be claimed for the property gifted away, so there's no loss to offset gain on sale of other property.

@Tom Beck There would likely be no gift tax liability due to the gift tax exemption, which is currently well above $1,000,000. There would be a gift tax return filing requirement, even with no tax due.

Such a transaction could jeopardize the previously executed  1031 exchange, as the IRS might assert that the property was never held for investment, but rather with the intent of gifting away to a child.