What would you do?

[Questionguy101]

Client calls to ask you a question. He says he is working on a 1031 exchange. You explain to him that it has to be a rental property for another rental property. He says it will be ok because he plans to rent the new property to his son........

Do you smell any potential problem that the IRS refuses to accept the property being considered rental because it is rented to taxpayer's own son?

[luke]

Would NOT answer that type of question by phone (unbilled) - sounds like an appt to make sure all facts are known so that correct answer may be given

[FEDUKE404]

Caution advised

I smell tax avoidance.

The first primary question would be is rental to son at fair market value for such.

Depending on your own credentials, I would tread carefully. In the past I have sent such clients to a tax attorney, and then I rely upon findings of the tax attorney for whatever tax treatment I give to the sales transaction.

My justification for doing so is not only the issues such as renting to a son, but for any 1031 exchange to fly there are many specific details which must be met for it to qualify as such. Many/most laymen clients just hear the word "exchange" and come up with all kinds of plans for such. The most common approach is to sell something/buy something later and then hope to make the taxes go away.

FE

[Questionguy101]

Would NOT answer that type of question by phone (unbilled) - sounds like an appt to make sure all facts are known so that correct answer may be given

Well, let's assume that he comes in to your office. What would you want to find out in order to make the decision whether you would report the transaction as a 1031 exchange for him?

He does everything by the rule, hiring an official 1031 exchanger to handle the deal, fulfilling all the time frame requirements of a 1031 deal, etc, but the fact that he plans to rent the new property to his son annoys me a bit.

[taxea]

I agree with Luke...too much info has to be obtained and explained without face to face or at least billing for consultation.

[tilt53]

Am I missing something? Doesn't the property to be exchanged have to already be a rental for it to be exchanged for another rental? Where did the "plan to be rented" enter into the equation?" That's why they call it a like-kind exchange.

[okie1tax]

Like Kind

I thought real property was real property, so long as it was business or investment use, no personal residence.

[S T]

Exchange

Sandy (OR this is Sandy (CA-NC
I wondered the same as in your post

Q101 - is the current property a Rental or Investment Property???

If the current property is not - then there is no sense in entertaining the 1031 Exchange Rules.

If the current property is currently prior to the Exchange and can be documented over the last year or two as such (Rental or Investment) - then there is still the hurdle of renting to a relative - as far as I know it should be at FMV - to escape any challenge on the exchange. All of the appropriate Schedules should be filed, and Schedule E should indicate the Rents and appropriate expenses, as well as the depreciation allocations.

You might want to refer them to a specialist such as Exeter(he has been a prior poster on TMI) http://www.exeter1031.com/EEL_FAQs.aspx or 1031 Corp https://www.1031cpas.com/1ten31Excha...angeManual.htm and then you can google for others.

There is a lot of good info on the internet relating to 1031 exchanges

Good Luck

Sandy (CA-NC)

[Questionguy101]

Am I missing something? Doesn't the property to be exchanged have to already be a rental for it to be exchanged for another rental? Where did the "plan to be rented" enter into the equation?" That's why they call it a like-kind exchange.

Nothing has been done yet. The old property has not been sold and the new property has not been purchased. He is still in the process to look for a qualified exchanger to handle the 1031 exchange. But he does plan to buy a new property and rent it to his son. I hope I have made myself cleared enough now.

[Gary2]

Nothing has been done yet. The old property has not been sold and the new property has not been purchased. He is still in the process to look for a qualified exchanger to handle the 1031 exchange. But he does plan to buy a new property and rent it to his son. I hope I have made myself cleared enough now.

Two questions:

1. Is the old property currently rented to a non-relative?

2. Have you asked him how he plans to determine fair market rental to charge his on?

We had a recent discussion on a similar issue, but for this particular 1031 case, I'd say that the choices to present to the client are to either get a professional opinion (if it can be found) or write "Audit me" in large red letters at the top of the return.