One of the many 1031 exchange requirements is the same taxpayer requirement wherein the taxpayer who sells a property is the taxpayer who buys the replacement property. Though seemingly straightforward, the requirement can be challenging for a variety of reasons. Many states impose a transfer tax for a change of record or registered title.
For example, the old or relinquished property is held by husband and wife. The new or replacement property must be held in the name of both spouses. If only the husband is on the replacement property deed and not both, the wife must report 50% of the gain on the sale of the property. If the old property is held as only the wife's property, the replacement property must also be held in her name. Seek legal counsel for a remedy once the exchange is "old and cold."
Partnerships owning property at the time of the exchange must take ownership in the same partnership. They can not sell and purchase the property in their own names unless with careful planning at least one year prior to the exchange, they drop ownership to the partners, potentially liquidating the partnership and exchange allowing each partner to either sell or exchange in their names. This is known as "drop and swap." Seek counsel when considering from your accountant or legal advisor.
If a single member limited liability company (SMLLC) is on title to the relinquished property, the single member has the option to take title to the new property in the name of the SMLLC or in the name of the member given the entity is disregarded for federal tax purposes. This reverse is also; the relinquished property is owned by the individual. The replacement property may be purchased in the name of the SMLLC.
What's your take away? When considering an exchange, ask yourself whether you want to hold the new property the way you currently hold the old property. If not, begin researching your options, NOW. Don't wait until right before the closing. Why, another 1031 requirement known as holding period has it's own set of rules to satisfy.
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