Client called today and wants to sell property to her son and the son will sell his property to his Mother.Son is o.k.under Sec 125 but Mother has owned property she has for less than a year.Mother will use property she buys from son as a rental.The property Mother is selling is valued less than son's property so she will pay him the difference. Can this be a 1031 exchange since the property Mother is buying from son will be rental or will she just have to pay taxes on the gain. She wants to move property and rental income into a trust in the futrue.Should she do that now?
-
-
Thanks ST
I thought there was a related party rule, just didn't think of it. Mind has been on vacation but time to beef up as tax season is just around the corner. -
depends on what she wants
As to whether she can do a 1031 exchange, it would seem that the relinquished property has not been held for investment or business. You haven't identified its use, but at any rate the short holding period suggests another purpose.
As to whether she should set up a trust, you haven't provided nearly enough information. Some of the most important factors to consider are very subjective so a lot depends on what she wants to do.Comment
-
One more Problem
The Mother's property is held as investment property but the son's was a personal residence. I know that a personal residence does not qualify for 1031 but exchange will be for investment property for property to be used for rental. Does this still get the 1031 treatment on Mother's end. Son is o.k.,will get sec 121.Comment
-
Yes
Client didn't provide must info on the trust. Said she was thinking about it. I don't do trust so will leave that to someone else. Her property was bought as investment. Got a good deal on a piece of property and bought it resale at a later date but son wanted to move and she wanted a rental home. Has two more rental properties so she does a lot of investment.Originally posted by jainenComment
-
Related Party and 1031 Exchange
Don't you mean Sect 121If Sect 121 I am not sure how that will work with 1031 exchange!?Son is o.k.under Sec 125 but Mother has owned property she has for less than a yearNeed someone elses' opinon here, but There is a 1031 exchange related party ruleA personal residence is not 1031 property and is accounted for under the rules applicable to the sale of a personal residenceI have found this website relating to 1031 exchanges to be very informative http://www.1031cpas.com/1031%20literature.htmThe Two-Year Holding Period Requirement. There is a special rule for exchanges between related parties (ยง1031(f)) which requires related taxpayers exchanging property with each other to hold the exchanged property for at least two years after the exchange to qualify for non-recognition treatment. If either party disposes of the property received in the exchange before the running of the two-year period, any gain or loss that would have been recognized on the original exchange must be taken into account on the date that the disqualifying disposition occurs.
So I am looking forward to more discussion on this topic!
SandyComment
-
Wrong Key
Yes I hit the wrong key sec 121 not 125Originally posted by S TComment
-
No way
>>The Mother's property is held as investment property<<
That's not exactly true. Although there is no statutory time limit for qualifying as 1031 property, less than one year would generally not be long enough unless there are supporting factors. The kinds of things that help are circumstances that the mother had no control over, such as a death in the family, a major reversal of fortune, or a natural disaster which forces her to change her plans.
None of that happened. Instead, she is transferring the property to her son a short time after acquiring it. This has the further personal benefit of helping her son dispose of his house. To top it all off, her basic plan in acquiring the rental is to take her own name off title! Gee, I wonder who the beneficiary of the trust is going to be!
This is not a 1031 exchange. No way.Comment
-
1031 Exchange
I agree with Jainen, that holding the property for less than 1 year and probably trying to accomplish a related party exchange, would disqualify the property for the 1031 exchange treatment. However, it does depend on the facts and circumstances as Jainen pointed out on how the Mother acquired the property. Might have more credance if the Mother was exchanging with the Son and the Son's property were also rental property not personal residence.
As far as creating a Trust, ?? A Living Trust, for estate and probate issues and placing the property into the Living Trust (if that is what the client is referring to) I am not sure, but I would think that would not have a bearing on the 1031 exchange. If the t/p was going to retitle as a partnership, LLC, S Corp or some other entity I would question!
I haven't found the thread, but I know personally I asked this question sometime in October/November 2005 on this board, about the transfer from h/w to an LLC, etc. All my research that I had also done off the board, was that it could be considered a sale and disqualify the 1031 exchange. Change of ownership.
So on the surface without more facts, I would think that the t/p could create the Trust (if Living Trust) first and place the Mother's property inside the Living Trust), then do a lot of research on the exchange between the related parties. If some other type of Trust, then really do a lot of research.
SandyComment
-
The only real issue
The only real issue with a related party exchange is that relinquished property is tracked for two years, so that if the son disposes of it the mother's exchange would be invalid. It doesn't matter that the house was not 1031 property in the hands of the son, and a living trust is a disregarded entity and shouldn't be a problem for a 1031 exchange, at least technically.
So there is a chance to claim the transaction meets the standards for 1031 if you want to take a particularly aggressive position. But since the property was held for such a short period the exchanger needs to strengthen her position and she doesn't have much to work with. There's no indication of a background as an investor or landlord, and the home itself was not in the rental market. Instead of maintaining her investment, she is adding cash and greatly changing the use of her holdings. That also is technically allowed in 1031, but it chips away at her overall credibility. Similarly, a qualified intermediary is not strictly needed for a direct trade but would look better in this situation where almost nothing looks very good.
What it does look like is a step transaction in which the mother helps her son acquire a new lot and step up the basis for renting out his old home. If they want to make this work, they need to slow the time line down and carefully structure and document the plan with tax and exchange professionals.Comment
-
1031
JainenDonanitaThere's no indication of a background as an investor or landlord, and the home itself was not in the rental market.I think, if she follows all the rules, should have no problem in the exchange.Has two more rental properties so she does a lot of investmentComment
Comment