Same Taxpayer Required When Exchanging | Taxpayer requirement
It is accepted that the taxpayer who sold the relinquished property must be the same taxpayer who purchases the replacement property. Another truism is the tax return that exchanges the relinquished property is the tax return that purchases the replacement. Section 1.1031 (a)(3)(a) – (b) states property received in the exchange will not be like‐kind unless identified on or before 45 days after the date the taxpayer transfers the relinquished property in the exchange and received on or before 180 days after the date the taxpayer transfers the property relinquished in the exchange. Whoever is on the deed to the relinquished property is the entity on the replacement property deed.
In the case of a husband and wife who exchange jointly, they should also appear as husband and wife on the replacement property deed. If the husband or wife holds title individually, then the replacement property title should reflect the same.
The death of a taxpayer during the exchange may be completed by the taxpayer’s estate or trustee. If the exchange is not completed, the relinquished property sale is taxable to either the taxpayer on his or her final tax return or to the estate.
The taxpayer who held the relinquished property in a revocable living trust may elect to hold the replacement property inside or outside of the trust. The taxpayer will use his or her social security number on the tax return and not file a separate return for the trust.
The tax return that sells the property is the tax return that purchases the replacement property. In the case where a single member limited liability company is on the relinquished property deed, either the member or the limited liability company may be on the replacement property deed. The single member limited liability company is considered a disregarded entity for Federal tax purposes. If a partnership is on the relinquished property title, then the same partnership must purchase and appear on title to the replacement property. The individual partners may not purchase in their individual names. Unless, as far in advance as possible, the partnership is dissolved, the relinquished property title is dropped to the individuals names. Can this be accomplished right before the sale? If so, the risk is the new entity holds title and the holding period clock starts again. The risk is that the deed drop was orchestrated for the purpose of the exchange and is likely to invalidate the tax deferral. Legal counsel is highly recommended when considering changing taxpayers prior to the exchange.
If a corporation is on title to the relinquished property at the time of the exchange, the corporation must be on title to the replacement property and not the shareholders. If the shareholders are on title of the relinquished property, then they must be on title to the replacement property not the corporation.
Though the term taxpayer is not explicitly defined in the 1031 Code, the abundance of interpretations and private letter rulings provide adequate guidance.
Article by: Whitney Brennan
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