Recent Developments


You can swap real estate and other assets tax free. It's called a tax deferred like kind exchange under Code Section 1031. 1031 provides mandatory nontaxable exchange treatment if the requirements of the statute are satisfied: (1) The form of the transaction is a sale or exchange; (2) Both the property transferred and the property received are held either for productive use in a trade or business or for investment; and (3) The property transferred and received is like-kind property. A special rule is provided if the exchange is between related parties. Related parties include family members, limited liability companies in which the same individual owns more than 50% of the interests, etc. 267(b), 707(b)(1). If you exchange like-kind property with a related party, and either of you transfers the property received in the exchange within two years, the tax deferral of 1031 will be forfeited, and gain will have to be recognized. IRC Sec. 1031(f). This result won't be triggered by death, as a result of a compulsory conversion, or if you can convince the IRS that the exchange and later disposition of the like-kind property were not intended to avoid tax. In a recent private letter ruling the IRS held that the taxpayer's exchange of 1/3rd of property A for his brother's and niece's (she was the sole beneficiary of a deceased sibling's trust) 2/3rds interests in property B was not done to avoid tax. The fact that one of the properties was sold to the city in which it was located within 2 years did not imply a tax avoidance motive. The tax deferral of Code Section 1031 was not tainted. The brother was the trustee of a trust of which the niece was a beneficiary. A trustee and a beneficiary are related parties for this test. However, the IRS noted that had the property been distributed to the niece on the trust's termination, the brother and she would not have been related parties since there would have been no trustee/beneficiary relationship. Finally, a transaction involving an exchange of undivided interests in different properties that results in each taxpayer holding either an entire interest in a single property or a larger undivided interest in any of such properties, is generally not viewed as a tax avoidance motive.

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