1031 exchange

[Art]

a prior executed purchase agreement has been revealed and I need to bring this up again.

Sorry for the long post.

Two brothers A & B have an executed written agreement dated in 2002 setting forth a purchase agreement in which the first brother A will exchange his farm ground and his personal residence located on his farm for the second brothers B farm property plus the receipt of $ 30,000. The agreement formalized A’s previous written request made over 15 years ago and accepted by B. This purchase was to take place upon the death of the A. A is now confined to a nursing home with no expectation of returning to his home (since 18 months ago). His daughter has power of attorney for all his affairs and she and B now wish to do a 1031 exchange of the farm parcels. B wishes to acquire the residence for investment. Before the exchange takes place the residence can be deeded separately and purchased by B for the agreed price of $ 30,000 ( which will be much less than FMV) as stated in A’s letter and the 2002 written agreement. We are getting current appraisals for both farm parcels and the residence. However, it appears that there will be a large disparity in current FMV between the two parcels with brother A giving up greater value than he would receive. There are no mortgages on any of the properties and no other considerations to be given or received. A's initent is to "repay" B for his personal assistance in helping him acquire the farm property over 40 years ago. No monies were ever expended by B, but he was instrumental in acquiring the farm for A.

Question 1: Can we do a valid 1031 exchange were the TOTAL consideration given and received are not equal? Ie the value of the qualified property, other property, cash, ect given are not equal to the values received. The examples I have seen in tax school materials have always included cash, non qualified property or assumption of liabilities to make the total values equal. I have looked, but I can not find a specfic site to answere this question.

Question 2: If the residence is included as part of a valid 1031 with unequal FMVs, it would be considered non-qualifying property for A since it was his personal residence and any gain that would be realized on the transfer could be excluded under Sec 121. Right? What is the proper measurement for the "sales price", FMV of the residence from the appraisal, purchase price in the contract, or some allocation of total FMV of the property received from B?

Question 3: If the residence is sold in a separate transaction for $ 30,000 is this considered a "bargain sale" ? partial gift? How do you measure the gain to be realized? Cash price or FMV vs cost basis? Again, Sec 121 should be avaiable to exclude the gain, but what is the proper amount to be reported on his 1040?

Question 4: If not a valid 1031, again do we have a bargain sale? or gift ? ie Would B have to recognize taxable income for the excess of FMV received vs FMV given up over the cost basis in his farm parcel? If this is a bargain sale, again how do we measure the gain to be reported, FMV of the property or actual cash price? For a gift, does there need to be a clear verbal or written expressed intent by A or does the simple fact that cash price is much less than FMV make it a gift transaction?

A’s attorney (who says he has done many 1031 exchanges) is taking the position that if the residence is removed from the farm parcel and sold separately for the $ 30,000 stated price, that the 1031 exchange can be done with no adverse tax consequences to either party. He insists that the FMV at the time of the original agreement is controlling and that they were essentially equal at that time. I asked him for support for that position, but he has not provided any. I do not see how we can use those values on the 8824. Correct?

I had previously suggested that written documentation of gifts might be made for:

1. the excess of FMV for the residence over the cash price of $ 30,000 and for

2. any excess of FMV of A's farm parcel

prior to 1031 land exchange, but the attorney did not want to use any of the gift tax credits at this time.

I admit that I am very concerned as to how the properties can be exchanged without adverse tax consequences if the gift approach can not be used. I would sincerely appreciate input from others on this forum.

[jainen]

>>I have posted this before<<

For my part, if you ask the same question you will get the same answer. And mine was the only answer you got from this forum. To summarize, certainly the trade can involve unequal values. Proceeds from the transaction are allocated to the old and new properties by CURRENT fair market value. In general, I think the concept of holding for business/investment use is seriously compromised by the decades-long and recent personal intentions, but I will not second-guess the attorney who is reading and drafting the actual documents. Since you remain skeptical, have someone else look at the deal.

[jainen]

>>he has done many 1031 exchanges<<

In my experience, "done" usually means "know of" and "many" usually means "more than zero." But if he is so studied on the subject, why can't he cite some authority? Section 1031 is one of the very oldest parts of the tax code, so there is more than seventy years of court rulings. Ask him to explain specifically how he plans to avoid the "step doctrine" while selling the boot in a parallel transaction. Ask him under what legal theory that old agreement "is controlling" the current fair MARKET value required by IRC Section 1031. Ask him what legal relevance that agreement even has, since A has not died and is not selling the property.

Well, maybe I am second-guessing the paper guy.