8824 Like Kind Exchange

[Brian EA]

My client sold a rental house in sept 2005. In Oct he bought a rental condo and paid cash with the proceeds from the sale of the rental house.
The rental house was fully depreciated so he had to add it back to calculate the capital gains tax. His tax liability is approx $55000.

He said he had a discussion with a tax attorney who told him that he can do a 8824 exchange.

Any thoughts

[veritas]

I think the tax attorney should do the tax return.

[S T]

Facilitator/Accomodater

T/P needed to use an escrow company/attorney (depending on state) and a 3rd party facilitator. T/P can not touch the $$$ from the sale.

Sandy

[Brian EA]

T/P needed to use an escrow company/attorney (depending on state) and a 3rd party facilitator. T/P can not touch the $$$ from the sale.

Sandy

That would be a 1031 exchange Sandy. I already told him he is disqualified from that transaction. The explanation in TTB is not that clear.

WHERE IS BEES WHEN I NEED HIM.

[Unregistered]

1031

A good web site for 1031 exchange

http://www.1031cpas.com/1031%20literature.htm

[S T]

fORM 8824

Brian,
Form 8824 is a LIKE KIND EXCHANGE. I think your T/P is disqualified as the third party facilitator/accomodater was not used. I thought that was your question??

Your T/P will have to pay the taxes on the sale of the rental. No reinvestment allowed, failed like kind exchange.

Sandy

[Brian EA]

Brian,
Form 8824 is a LIKE KIND EXCHANGE. I think your T/P is disqualified as the third party facilitator/accomodater was not used. I thought that was your question??

Your T/P will have to pay the taxes on the sale of the rental. No reinvestment allowed, failed like kind exchange.

Sandy

That's what I told him but some Miami tax pro told him differently

Thanks Sandy

[S T]

More Info

Brian,
I guess you will have to obtain more info from the T/P. Maybe request your client to provide you with the information from the attorney, IRS code section, etc.

If a facilitator/accomodator was not used, I really don't think the T/p will qualify for a 1031 exchange, after the fact. I think the last I read there is no reinvestment deferment on investment property. I have even encountered the old reinvestment rules to defer capital gains on primary residence this year.

It is alway disconcerting about the "stories" that fly around about what you can do to defer or minimize taxes.

Sandy

[Bees Knees]

That would be a 1031 exchange Sandy. I already told him he is disqualified from that transaction. The explanation in TTB is not that clear.

WHERE IS BEES WHEN I NEED HIM.

So what other code section would you suggest, if not a 1031 exchange?

Would you like to try 1032? Exchange of stock for property?
1033, Involuntary conversions?
1034, repealed in 1998?
1035, exchange of insurance contracts?
1036, stock for stock of same corporation?
1037, exchanges of US obligations?
1038, reacquisitions of real property (reacquisition of SAME property)?
1039, repealed in 1990?
1040, the executor of the estate transfers property under a section 2032A election?
1041, transfer of property between spouses or incident to divorce?
1042, sales of stock to employee stock ownership plans or certain cooperatives?
1043, sale of property to comply with conflict of interest requirements?
1044, rollover of publicly traded securities gain into specialized small business investment companies?
1045, rollover of gain from qualified small business stock to another qualified small business stock?

That's it. The complete list of nontaxable exchanges.

Take your pick. Which one applied to your client?

[Brian EA]

So what other code section would you suggest, if not a 1031 exchange?

Would you like to try 1032? Exchange of stock for property?
1033, Involuntary conversions?
1034, repealed in 1998?
1035, exchange of insurance contracts?
1036, stock for stock of same corporation?
1037, exchanges of US obligations?
1038, reacquisitions of real property (reacquisition of SAME property)?
1039, repealed in 1990?
1040, the executor of the estate transfers property under a section 2032A election?
1041, transfer of property between spouses or incident to divorce?
1042, sales of stock to employee stock ownership plans or certain cooperatives?
1043, sale of property to comply with conflict of interest requirements?
1044, rollover of publicly traded securities gain into specialized small business investment companies?
1045, rollover of gain from qualified small business stock to another qualified small business stock?

That's it. The complete list of nontaxable exchanges.

Take your pick. Which one applied to your client?

Thanks to the whole gang. None of the 10's are applicable. I guess I will have to send him to the tax attorney who claims he can take care of it

[Bees Knees]

BTW, obviously the attorney was talking about a 1031 exchange. Section 1031(a)(1) says the exchange must be solely for like property. And section 1031(b) says the receipt of money is not like property, and therefore taxable.

It does not matter that the money was reinvested in like property. Just touching the money for one second disqualifies the transaction under section 1031.

This is an area that can cause malpractice for the one giving bad advice. The client could have gone ahead under the assumption that selling the property and reinvesting the proceeds in like property qualifies for tax free exchange treatment. If you are not clear that you CANNOT defer gain if you touch the cash, the client could sue you for bad advice. Allot is at stake. Unless you are an expert in this field, you need to tell your client in writing that he or she needs to seek the services of a third party qualified facilitator/accommodator. DO NOT try this at home, folks.

[Matt Sova]

Misunderstood

Perhaps the attorney told him the correct way to do it and the client misunderstood. Did the attorney put it in writing? If so, does your client have that written information? If the client goes back to the attorney and confronts him with this the attorney could simply say "That is not what I said. I told you to use an intermediary". Then it will be the client's (uneducated) word vs. the tax attorney's (assumed knowledge of the tax law) word in a malpractice suit.

[Brian EA]

Perhaps the attorney told him the correct way to do it and the client misunderstood. Did the attorney put it in writing? If so, does your client have that written information? If the client goes back to the attorney and confronts him with this the attorney could simply say "That is not what I said. I told you to use an intermediary". Then it will be the client's (uneducated) word vs. the tax attorney's (assumed knowledge of the tax law) word in a malpractice suit.

Matt, this is after the fact. The transactions were completed in Oct 2005 and he met with the attorney last week .This wastheir first meeting.
I started his return about 3 weeks ago. After I showed him the figures he went and applied for an equity loan on the property. He called last night and informed me of his meeting with the tax attorney.
As far as my discussion went with him, he had not contacted anyone before.
Incidentally he is an H & R block employee but he is a very old guy and he does not have that confidence in doing his own return, especially with this transaction.

From the onset I told him that he screwed up. He did not ask any one for any advice . He just sold the property and bought another one and he thought that he would be able to defer the gain.

[Matt Sova]

Tax Atty

Maybe you should contact the T.A. and give him some tax advice. I have no idea what he could possibly be thinking.

[Brian EA]

Update

My client just came in and said that both closings were done on the same dayThe first closing agent then gave the proceeds to the second closing agent. The house that was purchased was identified 2 months before closing.

He also said that he had several discussions with the tax attorney who told him in no uncertain terms that he can file the 8824 like kind exchange form.