All Forum Posts by: Bernard Reisz

@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.

@Deanna Hubert As pointed out by @Jay Hinrichs, subdividing, developing, and selling individual units will result in the conversion of long-term capital gain income to ordinary income (ouch!) and preclude you from deferring any such gain via 1031 exchange. You should work with your advisors to explore options that may enable you to proceed with development, without any of the foregoing adverse implications - assuming you determine that you would otherwise proceed to develop on your own.  

@Justin R. Like @Brian Moore, I'd be glad to know how things played out. 

For whatever it's worth, I'll also add my 2¢ to the discussion. 

The concern here would not be the "same taxpayer" requirement, as title on the relinquished property would be the same as on any replacement property. 

The concern here would be the "held for investment" requirement. Although you had clearly held the property for investment, the recipient of a gift who immediately sells their portion has not held it for investment. Rather, from the perspective of the donee, it appears to be property acquired for sale.

This reframing of the question does not make the helpful insight and context provided by @Michael Plaks any less relevant.