life estate in rental property

[jainen]

Can you use Section 1031 to exchange a life estate in rental property for a life estate in rental property?

[Bees Knees]

Assuming the person who owns the life estate interest has the power to exchange it for another rental property, I don't see why it would be any different than any other investment property exchanged under Section 1031.

[Bees Knees]

I would also say, though, that there could be issues with the estate planning aspect of doing the exchange. Why is the property held in a life estate? Are they simply just trying to avoid probate at death? or is there some estate tax issue involved?

If you are trying to avoid estate tax on the appreciation of the property after it was placed in the life estate, I don't think the person is allowed to have the power to be able to exchange it or have any control over the property. Life estates where the grantor has the power of appointment means the entire interest is subject to estate tax at the death of the grantor. See TTB, page 21-24.

[jainen]

like kind exchange

The children inherited this rental property ten years ago when father died, with life estate granted to surviving spouse. She is entitled to the rental income. The kids want to trade into a property where they will operate a business.

The question is, can a life estate (which is a tenancy, not a true ownership interest) be used in a like kind exchange.

[Bees Knees]

Well, if they have the power to sell the property without the surviving spouse's consent, then they have a true ownership interest. Tenancy IS a true ownership interest if you have the power to sell it. Section 1031 only deals with the sales and exchange issue. In other words, is the transaction (the exchange of one property for another) subject to tax or tax deferral? It doesn't say anything about multiple forms of ownership. You would assume that the same multiple owners would have to have the same ownership percentages and powers with the new property as they had with the old property. If, for example, this was a way to get the surviving spouse out of the equation after the exchange, I think you would have problems here because the remainder persons somehow got something extra than just a new piece of property. That extra could be considered boot. But if everyone had the same equal rights they had before the exchange, then I don't see anything different than any other 1031 exchange.