Sorry for the long post.
Two brothers (A & B) have an executed written agreement dated in 2002 setting forth a purchase agreement in which the first brother (A) will exchange his farm ground and his personal residence located on his farm for the second brothers (B) farm property plus the receipt of $ 30,000. The agreement formalized A’s previous written request made over 15 years ago and accepted by B. This purchase was to take place upon the death of the A. A is now confined to a nursing home with no expectation of returning to his home (since 18 months ago). His daughter has power of attorney for all his affairs and she and B now wish to do a 1031 exchange of the farm parcels. B wishes to acquire the residence for investment. Before the exchange takes place the residence can be deeded separately and purchased by B for the agreed price of $ 30,000 as stated in A’s letter and the 2002 written agreement. We are getting current appraisals for both farm parcels and the residence. However, it appears that there will be a large disparity in current FMV between the two parcels with brother A giving up greater value than he would receive. There are no mortgages on any of the properties and no other considerations to be given or received.
Question 1: Can we do a valid 1031 exchange were the TOTAL consideration given and received are not equal? Ie the value of the qualified property, other property, cash, ect given are not equal to the values received.
Question 2: If not, do we have a bargain sale? or gift ? ie Would A have to recognize taxable income for the excess of FMV received vs FMV given up over the cost basis in his farm parcel?
A’s attorney (who says he has done many 1031 exchanges) is taking the position that once the residence is removed from the farm parcel that the 1031 exchange can be done with no adverse tax consequences to either party. He insists that the FMV at the time of the original agreement is controlling and that they were essentially equal at that time. I asked him for support for that position, but he has not provided any. I do not see how we can use those values on the 8824. Correct?
I had previously suggested that gifts might be made for the excess of FMV for the residence and the farm parcel prior to 1031 land exchange, but the attorney did not want to use any of the gift tax credits at this time.
If nothing is done now at the time of A's death, say 5 years down the road, I am very concerned that B will incurr a large tax liability on the purchase.
I admit that I am at a loss as to how the properties can be exchanged without adverse tax consequences if the gift approach can not be used. I would sincerely appreciate input from others on this forum.
Two brothers (A & B) have an executed written agreement dated in 2002 setting forth a purchase agreement in which the first brother (A) will exchange his farm ground and his personal residence located on his farm for the second brothers (B) farm property plus the receipt of $ 30,000. The agreement formalized A’s previous written request made over 15 years ago and accepted by B. This purchase was to take place upon the death of the A. A is now confined to a nursing home with no expectation of returning to his home (since 18 months ago). His daughter has power of attorney for all his affairs and she and B now wish to do a 1031 exchange of the farm parcels. B wishes to acquire the residence for investment. Before the exchange takes place the residence can be deeded separately and purchased by B for the agreed price of $ 30,000 as stated in A’s letter and the 2002 written agreement. We are getting current appraisals for both farm parcels and the residence. However, it appears that there will be a large disparity in current FMV between the two parcels with brother A giving up greater value than he would receive. There are no mortgages on any of the properties and no other considerations to be given or received.
Question 1: Can we do a valid 1031 exchange were the TOTAL consideration given and received are not equal? Ie the value of the qualified property, other property, cash, ect given are not equal to the values received.
Question 2: If not, do we have a bargain sale? or gift ? ie Would A have to recognize taxable income for the excess of FMV received vs FMV given up over the cost basis in his farm parcel?
A’s attorney (who says he has done many 1031 exchanges) is taking the position that once the residence is removed from the farm parcel that the 1031 exchange can be done with no adverse tax consequences to either party. He insists that the FMV at the time of the original agreement is controlling and that they were essentially equal at that time. I asked him for support for that position, but he has not provided any. I do not see how we can use those values on the 8824. Correct?
I had previously suggested that gifts might be made for the excess of FMV for the residence and the farm parcel prior to 1031 land exchange, but the attorney did not want to use any of the gift tax credits at this time.
If nothing is done now at the time of A's death, say 5 years down the road, I am very concerned that B will incurr a large tax liability on the purchase.
I admit that I am at a loss as to how the properties can be exchanged without adverse tax consequences if the gift approach can not be used. I would sincerely appreciate input from others on this forum.
Comment