miller nash llp | Winter 2012 brought to you by the tax law practice team Tax-Free Exchange Advisor Related-Party Exchanges Can Sometimes Be Tax-Free party if both parties wait two years before Rul 200730002 (Apr. 26, 2007); Priv Ltr disposing of either property. The disposi- Rul 200706001 (Oct. 31, 2006). See also tion of either the relinquished property Priv Ltr Rul 200541037 (June 29, 2005); by Ronald A. Shellan or the replacement property following Priv Ltr Rul 199926045 (Apr. 2, 1999). ronald.shellan@millernash.com the death of the taxpayer or the related (503) 205-2541 No Net Tax Savings From Exchange. party is an exception to the two-year rule. If the net tax paid as a result of the ex- Congress passed the related-party ex- IRC § 1031(f)(2)(A). A disposition of either change is greater than the tax that the change rules to prevent a taxpayer from property as a result of a condemnation or taxpayer would have paid, the exchange exchanging out of low-basis property and threat of condemnation of the property is permissible because there will have acquiring high-basis property from a is also an exception to the two-year rule. been no tax-avoidance purpose. For related party. There are a number of sig- IRC § 1031(f)(2)(B). example, if the taxpayer were to complete nificant exceptions to the general rule. Sell Relinquished Property to Re- an exchange by which he acquired the One of the most important excep- lated Party. The taxpayer may sell the replacement property from his sister tions is available if either the disposition relinquished property to a related party (deferring $300,000 of taxable income), of the relinquished property or the and buy the replacement property from the exchange would be tax-free as long as acquisition of the replacement property an unrelated party, even if the related (continued on page 5) did not have as one of its principal pur- party plans to sell the relinquished prop- poses the avoidance of federal income erty within two years. See Priv Ltr Rul taxes (the “No Tax Avoidance Exception”). 200709036 (Nov. 28, 2006); Priv Ltr Rul inside this issue IRC § 1031(f) (2) (C). This exception has 200712013 (Nov. 20, 2006); Priv Ltr Rul 2 Exchange Tossed—Replace- expanded over the years and provided 200728008 (Apr. 12, 2007). The IRS has ment Property Was Really quite a number of different ways to avoid taken the position that that there was no Taxpayer’s Residence the related-party rules. These exceptions basis swap and neither party cashed out 3 How Long Must I Hold It? are discussed more fully below. But a of its investment in real estate. note of caution: This exception has an ad- 4 Taxpayer Caught Complet- Undivided Interests Exchanged. ing Indirect Related-Party ditional requirement that the application If the taxpayer and its related parties Exchange of the exception must be “established to own undivided interests in multiple the satisfaction of the” IRS. 5 Goodwill Can Be Exchanged properties, the parties may complete if Treated as Real Estate What follows is a laundry list of the exchanges, even if the parties will not exceptions to related-party rules: all hold their interests in the properties for an additional two years, provided that Two-Year Wait. The taxpayer may at the end of the exchange each party convey the relinquished property to a owns an entire property or owns a larger related party and receive in exchange undivided interest in a property than it replacement property from the related owned before the exchange. See Priv Ltr www.millernash.com
Exchange Tossed—Replacement Property Was Really Taxpayer’s Residence the homeowner covenants governing that the property was not intended for the property. The taxpayer even started personal use. Second, be careful what remodeling the property’s basement you say to anyone about your intent by Ronald A. Shellan within a few weeks after purchasing (with the exception of your lawyer) be- ronald.shellan@millernash.com the property. cause it could end up in court. Finally, (503) 205-2541 and perhaps most importantly, this A really scary fact was that the ac- case once again proves that one can The Tax Court had no trouble toss- commodator’s staff was called to the be too aggressive. The taxpayer should ing out an attempted tax-free exchange witness stand. Testimony revealed that have either given up trying to com- because the replacement property was the taxpayer had asked the accommoda- plete an exchange or made an earnest determined to be the taxpayer’s resi- tor if the taxpayer could move into the and meaningful attempt to lease the dence. Pebble Beach property if no one could property. be found to rent it. The Court found The taxpayer in Goolsby , TC Memo that this showed intent to move into the 2010-64, sold investment property and property. exchanged it into a replacement-prop- erty home located in Fayetteville, Geor- What lessons does the Goolsby case gia, which the Court referred to as the teach us? First, a court will see through Pebble Beach property. For an exchange window-dressing attempts to pretend to be effective, both the relinquished and the replacement property must be held for investment or for productive use in a trade or business. In determining whether the re- placement property’s use qualifies for Estate Planning Seminar tax-free treatment, the courts have al- ways looked at the intent of the taxpayer on the day the replacement property is Engaged Guidance, Exceptional Counsel. acquired. The Tax Court determined For those in the Portland area, Miller Nash invites you to a complimentary one-hour program on that the Pebble Beach property was not estate planning. The program will answer the following questions: qualified replacement property on the • What is a probate? day it was acquired. • Who gets my assets if I don’t have a Will? Why did the Court make this • How are trusts set up and what are their uses? • Will my estate be subject to estate taxes? determination? The evidence showed • What are some approaches we can use if we have children from prior marriages? that the taxpayer actually moved into • Can a Will avoid probate? the house just two months after it • How do I plan for jointly owned property, 401(k) accounts, and life insurance benefits? was acquired. The taxpayer made the • What must I consider when passing property to children and grandchildren? purchase of the Pebble Beach property • What are the basic strategies used to minimize estate taxes? contingent on the sale of the taxpayer’s • What should business owners consider when planning their estates? existing personal residence. There were In addition to these topics, we invite other estate planning questions that you may have. The some attempts to rent the property, program is appropriate for business owners, retirees, and executives. Spouses and adult children are welcome to join. You can register by sending an e-mail to but the Court found them to be rather marika.giers@millernash.com or by calling 503.205.2367. pathetic. An ad was placed in a newspa- When: January 31 (9:00-10:00 a.m.) per for a few months, but the taxpayer Where: Miller Nash LLP (111 S.W. Fifth Avenue, Suite 3400, Portland, Oregon 97204) failed to research rental transactions in the Pebble Beach area and did not Continental breakfast provided. Parking will be validated. If the date above does not work for you, we will be hosting similar programs on March 6 and March 20. Find more information online at www.millernash.com. even know whether a rental violated 2 | miller nash llp | Tax-Free Exchange Advisor
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