Tax Deferred Exchange Company Philadelphia Metropolitan Office 1601 Market Street Suite 2650 Philadelphia, PA 19103 Main: (215) 564-3722 Fax: (215) 496-9224
It has been a busy spring and summer for our staff at Capital 1031. Sale Volume of investment and business properties continues to be at a record high and the numbers of 1031 exchanges being performed by our company continues to grow on a yearly basis. Recently, a number of our clients have called with questions about the vesting of title in the replacement property and, since this seems to be an area of growing concern, we hope this newsletter will help you educate your clients about this issue in the future.
To properly exchange investment property under IRC €1031, the Taxpayer must hold title to the replacement property exactly as they held title to the relinquished property, with very few exceptions. In other words, the person or entity beginning the exchange must be the same person or entity completing the exchange. For example, if a spouse owns the relinquished property, then only that same spouse may acquire the replacement property.
Frequently, problems will arise in situations where a Husband or Wife owns the property separately and the lender requires that both the Husband and Wife take title to the replacement property in order to qualify for a loan. Adding the spouse on the title to the replacement property may cause the 1031 exchange to fail. It is important for the Taxpayer to anticipate any vesting issues that may arise prior to the exchange because these issues are much easier to resolve before going to closing.
The Internal Revenue Service has permitted one major exception to the general rule. An individual taxpayer may purchase the replacement property in an entity in which the taxpayer is the sole shareholder of member. This issue has allowed individual taxpayers to convert their properties to Limited Liability Companies (LLC's) or Corporations and attain liability protection. Hence, it is common that individual taxpayers are forming LLC's or Corporations to hold their replacement properties.
The following scenarios are PROHIBITED for €1031 exchange purposes:
1.
Husband or Wife relinquishes and Husband and Wife acquire.
2.
ABC Corporation relinquishes and XYZ Corporation acquires.
3.
ABC Partnership relinquishes and XYZ Partnership acquires.
4.
ABC Partnership relinquishes and partners acquire property as individuals.
5.
Multi-member LLC relinquishes and members acquire property as individuals.
6.
ABC multi-member LLC relinquishes and XYZ multi-member LLC acquires.
The following are some examples of exceptions that would not be prohibited:
1.
Husband and Wife as trustees of a revocable living trust, which is a true pass through trust, relinquishes and Husband and Wife acquire as individuals.
2.
Single member LLC relinquishes and sole member acquires as an individual.
3.
Individual relinquishes and individual's estate acquires due to the death of the individual
4.
Trustee of a revocable living trust, which is a true pass through trust, relinquishes and Trustee acquires as individual.
5.
Individual taxpayer relinquishes and LLC composed of individual taxpayer purchases.
An important issue to consider when planning to do an exchange is that the Taxpayer should not make any changes in the vesting of the relinquished or replacement properties prior to or during an exchange. Please contact Steven D. Rothberg, Esq, or Valerie Gribbin, Esq, to discuss this Newsletter or any of your other exchange questions at (215) 564-3722.
This publication is the property of Capital 1031 Exchange Company, LLC, and any publication thereof without the written consent of Capital is expressly forbidden. This publication is for marketing purposes and should not be constructed as legal or tax advice. Any specific tax or legal questions should be directed to your tax advisor.
