I think you could do that and most likely not be challenged by the service. This is because of IRC 1041, no gain or losses recognized on transfers between spouse, which likely applies to transfer of relinquished property between spouses before the exchange.   But keep in mind the Taxpayer is to also have held the relinquished property for investment purposes for two years before the sale of the relinquished property.  However, the two years is not a hard and fast rule.  Again I see the possibility of a challenge by the service as remote. 

You could have the real estate put into a single member LLC with the taxpayer as sole member.  I use single member LLC's a lot in 1031 exchanges as they are disregard entities for 1031 purposes by the service.  In other words for state law purposes you have all the benefits of an LLC, but because it's a disregarded entity the service treats the taxpayer as owning the real estate.  But as you may know it must be a single member LLC.

Taking it a step further, If the taxpayer has a revocable trust then the trust can the sole member.   Again the service will not treat the clients revocable trust as separate from the taxpayer.  In the trust the taxpayer's interest interest can pass to the surviving spouse upon the taxpayers death.  If the taxpayer dies within two years then property goes to surviving spouse and you have step up in basis.  

David J. Franks
Franks & Roeder
5167 Utica Ridge Road
Davenport, Iowa 52807
(563)-359-4351
(563)-359-7711 FAX

Sent from iPhone



On Jun 15, 2016, at 9:46 AM, edean murray <realestate@iabar.org> wrote:

Mr. Franks,

 

Thank you for your analysis!

 

What do you think about the idea of adding the spouses to the undivided interests before the swap/exchange?  This way the couple would not have the 2-year wait period.

 

I usually have my families sign an exchange agreement specifically including language regarding the 2 year wait period for further sales or transfers.  I have done several of these, and other exchanges, in the past and I am familiar with the rules.  My initial question was more of a hope that something had changed that I was not aware of.

 

Thank you again!

Edean M. Murray

Murray & Murray, PLC

530 Erie St., PO Box 27

Storm Lake, IA 50588

Ph: (712)732-8181

Fax: (712)749-5089

 

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From: realestate-owner@iabar.org [mailto:realestate-owner@iabar.org] On Behalf Of david@davidjfrankslaw.com
Sent: Tuesday, June 14, 2016 6:04 PM
To: realestate@iabar.org
Subject: RE: [ISBA RealEstate] Land Trade / Exchange Question

 

Dear Edean:

 

The following is my humble assessment of the situation.  There must be the same taxpayer for the transfer of the relinquished property as for the replacement property.  My understanding is that Sam and John each hold title as tenants in common and their spouses are not on the title.  If that is the case I would have Sam Doe and his spouse (Husband and Wife, because of spousal rights) deed Sam’s undivided one-half interest to John Doe only and not name Johns wife on the deed as a grantee. And visa versa for the transfer by John to Sam.   I would then wait at least two years before having the grantees add their spouses as titleholders.   We all tend to think in terms of transactions between spouse as nontaxable, however, the rules for 1031 exchanges are a bit complicated.

 

We have done 1031 exchanges since the 1990s, including deferred exchanges, improvement exchanges and reverse exchanges, and do IRC 1031 exchanges all over the country.  We get all our exchanges from referrals by clients, CPA’s, banks, realtors and other lawyers.   If I understand the facts correctly this is a two party exchange or “swap”.  I would still have the parties enter into an exchange agreement that does not include a QI.  This makes it clear to the IRS that it is a 1031 exchange. 

 

If the parties are related then one has to consider the related party rules IRC 1031(f) which denies non-recognition of treatment to a taxpayer who exchanges property with a related party IF either the taxpayer or the related party transfers the property within two years of the date of the last transfer which was part of the exchange.  Therefore keep that in mind and advise both parties not to dispose of the property for two years following the exchange.   

 

However in a letter ruling (Ltr. Rul. 20073002 et. al. ) the IRS state that the related party rules of 1031(f) do not apply to dispositions following a partition of real estate among related parties.   In such an event the exchange could still fall with a nontax exception, and the related parties rules would not apply and the property could be disposed of within two years of the exchange.   The question is how did the related parties acquire the real estate?  If the parties intend to hold onto the land after the exchange for two years I would be tempted to still do a 1031 exchange agreement (without a QI).   

 

If you are interested I or one of my assistants would be happy to assist you in this matter.

 

David J. Franks

FRANKS & ROEDER

5167 Utica Ridge Road

Davenport, Iowa 52807

(563) 359-4351

(563)359-7711 FAX

 

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From: realestate-owner@iabar.org [mailto:realestate-owner@iabar.org] On Behalf Of edean murray
Sent: Tuesday, June 14, 2016 2:06 PM
To: realestate@iabar.org
Subject: [ISBA RealEstate] Land Trade / Exchange Question

 

When transferring land for land, such as between family members who currently own land together and are exchanging deeds so that each family member can have their own separate piece of land, can a spouse’s name be added to the title of the deed received?

 

For example:      John Doe deeds his undivided ˝ interest to Sam Smith.  (I know that John Doe’s wife needs to sign off on deed.)

                              As part of the trade can John Doe take the interest he receives from Sam Smith as John Doe and Jane Doe, husband and wife, as joint tenants with full rights of survivorship?

                              Or, does Sam Smith need to deed only to John Doe and then John Doe file a separate deed to John Doe and Jane Doe, husband and wife, as joint tenants with full rights of survivorship?  Again, I would have Jane Doe sign off on this deed.

 

Probably a very easy question.  Thanks for all responses.

 

Edean M. Murray

Murray & Murray, PLC

530 Erie St., PO Box 27

Storm Lake, IA 50588

Ph: (712)732-8181

Fax: (712)749-5089

 

The information contained in this email transmission (including any accompanying attachments) is intended solely for its authorized recipient(s) and may be confidential and/or legally privileged.  If you are not an intended recipient, or responsible for delivering some or all of this transmission to an intended recipient, you have received this transmission in error and are hereby notified that you are strictly prohibited from reading, copying, printing, distributing, or disclosing any of the information contained in it.  If you are a client of our firm, this confirms that communication to you by email is an acceptable way to transmit attorney-client information.

 

IRS Circular 230 Notice:  To ensure compliance with requirments imposed by the IRS, we inform you that, except to the extent expressly provided to the contrary, any federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

 

 

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