Recent Developments

You can swap real estate and other assets tax free. It’s called a
tax deferred like kind exchange
under Code Section 1031. 1031 provides mandatory nontaxable exchange treatment
if the requirements of the statute are satisfied: (1) The form of the transaction
is a sale or exchange; (2) Both the property transferred and the property
received are held either for productive use in a trade or business or for
investment; and (3) The property transferred and received is like-kind
property. A special rule is provided if the exchange is between related
parties. Related parties include family members, limited liability companies in
which the same individual owns more than 50% of the interests, etc. 267(b),
707(b)(1). If you exchange like-kind property with a related party, and either
of you transfers the property received in the exchange within two years, the
tax deferral of 1031 will be forfeited, and gain will have to be recognized. IRC
Sec. 1031(f). This result won’t be triggered by death, as a result of a compulsory
conversion, or if you can convince the IRS that the exchange and later
disposition of the like-kind property were not intended to avoid tax. In a
recent private letter ruling the IRS held that the taxpayer’s exchange of 1/3^rd
of property A for his brother’s and niece’s (she was the sole beneficiary of a
deceased sibling’s trust) 2/3rds interests in property B was not done to avoid
tax. The fact that one of the properties was sold to the city in which it was
located within 2 years did not imply a tax avoidance motive. The tax deferral
of Code Section 1031 was not tainted. The brother was the trustee of a trust of
which the niece was a beneficiary. A trustee and a beneficiary are related
parties for this test. However, the IRS noted that had the property been
distributed to the niece on the trust’s termination, the brother and she would
not have been related parties since there would have been no
trustee/beneficiary relationship.
Finally, a transaction involving an exchange of undivided interests in
different properties that results in each taxpayer holding either an entire
interest in a single property or a larger undivided interest in any of such properties, is generally
not viewed as a tax avoidance motive.