Discussion:1031 Exchange- Family - Complex question

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Discussion Forum Index --> Tax Questions --> 1031 Exchange- Family - Complex question


Jav (talk|edits) said:

10 January 2007
I'm not a tax professional and this is my first post so please be gentle - I know this is long.

I have been researching 1031 like kind exchanges quite extensivley, asking my CPA, (2) tax attorneys, (2) 1031 QI agencies and yes, even the IRS. Unable to get a consensus, I dug deeper. I think I understand the state of law as well as the 2002-83 ruling and TAM 9748006. But I'm questioning my understanding since the ruling's don't seem to make sense in light of the intent of 1031. I'm hoping there's a 1031 expert here that might be able to shed some light on my views.

Putting aside the family member provisions for the moment - My understanding of 1031's intent is to allow for like kind exchanges such that any gains or losses are not immediatly "recognized" by the exchangor, but are instead "defered" with the provision that the adjusted basis caries forward with exchanger/taxpayer and will eventually weigh in upon cashing out. So, if this exchangor (we'll call him B to make it easier later) has property 1 worth $100 with an adjusted basis of $20, and he exchanges that property with person (C) that has another like property 2 of the same worth but a $100 basis, after the exchange- party B ends up with a different $100 property & the same $20 basis and party C ends up with a different $100 property & the same $100 basis. Neither are in a better or worst position and neither is taxed upon the exchange - both are allowed to defer their taxes. Barring some death provisions that I don't need to explore, this is a legal tax "deferal" provision within the tax code and not a method to avoid taxes.

Now, in the vast majority of cases, there is rarely 2 persons that love each others property and want to just "swap" properties... it usually involves 3 parties (A,B and C) as well as a qualified intermediary (QI) where A want's B's property, and B avails himself of 1031 to do a like exchange in order to maintian non-recognition of unrealized gains. He then seeks out a like property (2) from C and the transaction flows to where A gets B's property (no tax consequnaces on a purchase)B gets a different property and keeps his basis and C gets cash and no property. The code recognizes this and to my way of thinking extends non recognition to B only. This is where it gets tricky.

In this example, party B is the only person entitled to non recognition unless party C enters into another 1031 exchange for another like property. If party C does not avail him or herself of 1031 provisions towards another like exchange, they are allowed to cash out as long as they recognize their gain or loss at that point and pay the resulting tax. For all intents and purposes, this type of 1031 transaction, which is by and large the most prevalent arrangement makes it legal for party B to defer his tax consequences (since he ends up no better or worst) and gives C two legal options. He can cash out and pay the taxes based on his basis, or he can intitiate another 1031 transaction to keep non recognition status. If he does not commence another 1031 transaction, and he is not required to by law, he does not benefit from non recognition, but B is not penalized for that.

Is that correct?

If so, I'll move on to where the family part becomes confusing.

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