Discussion:This is a good one! 1031 exchange
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| 27 February 2008 | |
| This is a complex 1031 exchange that started in 2005. My client, PIP, a partnership had four members of which a husband & wife , HW, had 50% ownership (one k-1) and his brother, DP, owned 25 % and another unrelated party, CC, owned 25%.
DP & CC own a property AZ, 50-50 A 1031 exchange is set-up: HW agrees to give their 50% ownership in A and B in exchange for DP’s and CC’s 50% ownership in C and 100% of AZ. No boot or mortgage relief. H and W are no longer members of PIP after this transaction takes place. I prepared the return in 2005. What a lot of fun that was since we had to figure the gain on a 50% exchange for three of the properties and 100% of another. Of course, the initial depreciation on the properties in 2004 was done wrong too. Their old accountant made no allocation between the building and the land. There were some messy calculations. When I calculated the deferred gain and completed the form 8824 I marked the exchange as a related party exchange. My problem is that my client had another 1031 exchange in 2006. They did not hold the properties for two years before disposing of them. They went to another accountant in 2006 because I had trouble with the exchange in 2005. They came back to me since the other guy had trouble too! (I think I need to amend that return since the “new old” accountant did not allocate the new adjusted basis between the two exchanged properties.) In this new exchange, A was exchanged for four other properties. Property B was sold in an unrelated sale outside of the new exchange. I think I made a mistake in calling the original exchange a related party exchange (“RPE”). (Of course the client needs me to be wrong in this case since it benefits them!) The rules for the related party require that the related party be a more than 50% owner. Since the HW owned only 50% of PIP, I think I can retract my initial classification of the exchange as being a RPE. My other support for my position is that the brother, H, really owned only 25% because his wife owned the other 25% of their 50% ownership of PIP. When I complete the 8824 in the amended 2006 return and in the 2007 return I will mark the form as not being exchanged with a related party. Do you agree with my new interpretation of the 2005 exchange? | |
| 27 February 2008 | |
| I believe your initial analysis was correct. The husband owns constructively 75 percent. Twenty percent from his wife and 25 percent from his brother are attributed to him. However, she would only be 50 percent because of her husband. | |
RoyDaleOne (talk|edits) said: | 27 February 2008 |
| Well, your facts are that PIP owned C and HW gives up their ownership of A and B (which they didn't own, PIP owns), how did you get around this problem. Them 50% of C (which PIP owned) is exchanged for AZ (which goes to HW).
Are you saying title to A B C was not held by PIP? | |
| 27 February 2008 | |
| Title was not held by PIP although the properties were included in the PIP tax returns. I'm sure that I should have treated the properties as contributions to the partnership and then make distributions of the property to HW and calculated any gain or loss on their distributions of partnership assets. Should I go back and amend the returns since 2005? Do I cross my fingers and hope the IRS doesn't question the return? The income for PIP is very little. The income in 2004 was $1,534, 2005 $9,756, 2006 ($7,280). | |
RoyDaleOne (talk|edits) said: | 27 February 2008 |
| That is good PIP did not have title to the proprieties,if PIP had title your 1031 exchange was in question. I see no need to amend any returns, because of that issue.
Note:This subsection shall not apply to any exchange of-- (A) stock in trade or other property held primarily for sale,
(B) stocks, bonds, or notes,
(C) other securities or evidences of indebtedness or interest,
(D) interests in a partnership,
Exchange of partnership interest is not allowed under 1031. Also note: For purposes of determining those exchanges of property that are subject to the holding period requirement, related persons are those with the following relationships (Code Section 1031(f)(3)): (1) brothers and sisters (whether by the whole or half blood), spouses, ancestors, and lineal descendants; | |
