If you were to exchange your property utilizing the benefits of IRC Section 1031, you can defer the tax on the gain, allowing reinvestment of all your equity in to one or several investment properties. However, great care must be taken when investors tries to complete their exchange by either selling or buying to a related family party.
Under IRS's definition, related parties include, but not limited to, immediate family members, such as brothers, sisters, spouses, ancestors and lineal descendents. Related parties do not include stepparents, uncles, aunts, in-laws, cousins, nephews, nieces and ex-spouses. A corporation, limited liability company or partnership in which more than 50% of the stocks, membership interests or partnership interests, or more than 50% of the capital interest or profits interest is owned by you is also considered to be a related party.
Two (2) Year Holding Requirement
• If a taxpayer sells relinquished property to a related party the related party must hold that property for two years and the taxpayer must hold his replacement property for two years also after the exchange - see IRC 1031(f)(1).
• If a taxpayer buys replacement property from a related party, or a related party owned the replacement property in the preceding two years, the taxpayer must hold the replacement property for two years. If either party sells within two years period, the gain deferred by the original exchange will be recognized as of the date of the later sale.
To end abusive basis shifting, Section 1031(f) was added in 1989. However, eight years later the IRS surprised everyone by enacting Tax Advisory Memorandum 9748006, which stipulated that replacement property could not be purchased from another related party.
To complicate matters, the IRS in 2002, further created Revenue Procedure Ruling 2002-83, which effectively limits related party transaction. Does this ruling permanently eliminate the purchase of property from a related party? Probably. It appears that the IRS practically has eliminated the option of buying replacement property from a related party; essentially, taxpayers only can sell their property to a related party as long as they abide by the two-year holding period.
Selecting a Qualified Intermediary:
From the simplest exchange to the most complex, we have built our reputation on expertise, financial strength, and customer satisfaction. Our company is one of the few that offers FDIC insurance on your exchange proceeds, we also operate nationally. All exchange proceeds are deposited in custodial accounts (interest bearing), and are insured by a Fidelity bond and D&O insurance. If you have any questions, I can be reach at 925-212-1727 or email me at wlam@AdelphiRetirement.com.
Wai-Yew "Andrew" Lam, President,
Adelphi Retirement Management, Inc. / www.AdelphiRetirement.com