Like kind exchanges

[Marie]

Mom wants to gift property to daughter. Then daughter wants to like/kind the gifted property to another property. Basis for daughter will be Mom's basis. Daughter can't sell new property for two years or Mom will have to pay taxes. Will all this be correct? Or is there more I need to know? Can it work this way?

[jainen]

>>Can it work this way?<<

No. The daughter can not use Section 1031 for property she has not held for a substantial time. Nor can the mother 1031 the property first and then transfer the new property. She can exchange it all right, but it must be reported as a fully taxable sale. The IRS has solid support from the courts in disallowing tax deferral when a change in title is one of the steps in an exchange, even if it is spread out over a year or more.

The gift probably has no problem. Mother would need to file a gift tax return but would not owe taxes unless she exceeds her million dollar lifetime maximum. (There is no two-year limit on gift tax.) However, it may subject her estate to high taxes after death, so she should get advice from a professional who is closely following the issue in Congress.

[Marie]

Thanks, she's coming this afternoon and I needed an answer. Could Mom like/kind her property for the new property and then later either do a beneficiary deed to daughter or gift later? (depending on change in tax laws)

[jainen]

>>like/kind her property for the new property<<

First of all, you haven't described "her property" so we have no way of confirming whether it is eligible for like-kind treatment. But Section 1031 will not prevent her from doing anything she wants. It's just that if she does not continue to use it for business/investment in the same name, she will have to report the exchange as a sale subject to capital gains tax. If the original return has already been filed, she would need to amend it and pay any back taxes with penalty and interest.

In my opinion, a 1031 exchange could not survive either a gift or a beneficiary deed within two years. Still, 1031 is very flexible. Depending on what your underlying goals are, there may well be a way to structure it. Certainly if you want ordinary things like relieving the Mother of management responsibilities, moving to a more profitable investment, ensuring the daughter inherits, and avoiding probate--all that can happen.

[Marie]

Property is house and acres. This property is owned by Mom, but daughter lives in house (not Mom) but does not pay rent. Exchange property is house and more acres. Boot will be involved. Mom wants daughter to have land either by gift or inheritance. We discussed inheritance as the best deal, until daughter wanted to exchange property, with Mom's consent of course. I told her the house would have to be a sale, not like/kind exchangable, but acres would work, as investment property. But if gifting before the sale is not a possibility, I'm not sure if Mom wants to get into all the like/kind exchange stuff. Mom doesn't have anything to do with current property, lets daughter take care of. Can you help me with the best solution, if one is possible?

[jainen]

>>acres would work<<

How many acres? It rather sounds like they are part of the homestead, none of which is eligible for a like-kind exchange. Tell them to go see an estate planner, for pete's sake! Put it all in a living trust or life estate or something, or sell it now while capital gains tax is low and so is replacement cost.

This is not a tax question. Our out-of-control political media has got everyone worked up. Look, tax on the sale won't affect the mother one way or another, and the daughter just wants to live someplace better. So my advice is to go ahead and sell it, and buy something that works for her with 75% of the proceeds. That's do-able, isn't it?