trustee holdback on 1031 exchange

[lnbehage]

Taxpayer is one of 7 beneficiaries of trust. Trust holds farmland rental and distributes it. Taxpayer sells her share to other beneficiaries and does an exchange into residential rental. Trustee officiates the sale and holds back $100K of the selling price in case there are tax consequences to closing the trust. Taxpayer receives the full $100K in next tax year.Is $100K considered boot?

Basis of prop given up $400,000
FMV of prop given up $500,000 (selling price)
Amount held back $100,000
Amount given to intermediary $$400,000
FMV of prop received $600,000

no liabilities assumed or given up

[Burke]

To the extent the entire proceeds were not invested in the new property, and $100k was received by the buyer instead, then yes, it should be treated as boot.

[JON]

Tough

question. In a partnership you cannot have the tax free exchange be the partnership interest you have to pass the property out to the partner and transfer the "property". No taxes on property distributions to a partner.

I do not think it works that way with a trust. I am confused as to why the trust is involved if the beneficiaries are buying it from her what does the trust have to do with it. I do not think the sale of trust interest for real estate is a 1031, but correct me if I am wrong.

[lnbehage]

1031 exchange

Yes an exchange may be done out of a trust. In this case, the trust is not listed on the escrow papers, that's why it looks to me as if the property was first distributed out of the trust to the beneficiaries . My client is selling her share of the farmland back to brothers and sisters. I am looking at it as if it were withholding for tax purposes. $100K was part of the selling price, not in addition to. Trustee held it back. My client then had to come up with extra cash out their own pocket to buy the replacement property. The $100K was not given to her by the seller of the replacement property, either, in addition to the real estate received.

[JON]

I agree

it has to be done out of th the trust to get 1031, but how could have it been done out of the trust if the trustee got some of the proceeds???? Was all the land sold or just your client's portion. What closer gave $100,000 to the trustee if the sale was done oustside of the trust??? If done correctly there is boot so somethign is taxable. Was the entire land sold and only your client elected to have 1031 apply.

[lnbehage]

Trust more info

Actually 2 trusts were involved. Mom had died along time ago. Her trust was irrevocable. Dad died in 2009 with a living trust. Land was held in both trusts and part of Dad's estate. 7 children were involved. 2 elected out of the "family business" that did get a special use valuation for being a family business. My client was one of the two and did an exchange. Other sibling, just sold their share of land back to remaining sibings. Both children that sold out, had $100K (total $200K) held back out of their selling price by the executor (one of the remaining siblings) of the estate. Escrow satement calls it an "Estate Tax Holdback." So in essence, it appears land was distributed to beneficiaries. Two of the beneficiaries sold their portions to the other 5 remaining siblings.

$100K was given to client months after the exchange took place and was not given up in addition to like property value given up, rather part of. The $100k was also not given to the client by the seller of the replacement like kind property nand received in addition to that property.

[Nashville]

Boot but

$100K is considered boot, but if this results in taxable income the installment method may be used to defer $100K of the proceeds until such time as it is received.

[Burke]

Agree. Regardless of the reason the $100k was held back, it was not transferred to the new property or added to basis as an expense of sale, but eventually was paid to the TP and therefore is considered boot. If TP received the $100k in a later tax year than the sale, then installment sale method can be used to report. This situation is more convoluted than most, but basically, siblings inherited the land at the father's death, then one exchanged their portion for new property. Trustee simply acted as qualifed intermediary.