In a recent Tax Court Memo 2014-110, an individual’s sale of real property and subsequent purchase of unimproved land failed to qualify as a §1031 like-kind exchange because the qualified intermediary, the taxpayer’s son, was a disqualified person. The taxpayer sold a parcel of property and purchased another parcel within the 45-day limit for identification of replacement property. The taxpayer argued that his son was a qualified intermediary because he was an attorney, and the funds received for the property were held in an attorney trust account. However, the like-kind exchange regulation is explicit: A lineal descendant is a disqualified person, and no exception is allowed to be made based on the intermediary’s profession. As a result, the taxpayer was subject to capital gains tax on the sale of the property, roughly $227,000 on $1.5M of capital gains.
In addition to using a qualified intermediary, other §1031 exchange requirements include:
- Property exchanged must be in the same general asset class or like-kind in nature and character;
- Replacement property must be identified within 45 days;
- Replacement property must be acquired within 180 days from sale of originating property, or the due date of the taxpayer’s return, whichever is earlier; and
- Proceeds from the sale of the original property must be placed in a qualified escrow to avoid “constructive receipt.”
Like-kind exchange transactions can be a very complicated process, but if structured properly, they can provide a significant tax benefit. If you are considering the sale and re-purchase of a similar property, please contact your Schneider Downs representative for further assistance and information regarding like-kind exchange requirements.
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