Development

Category: 1031 Exchange General

  • How to Calculate Your Potential Tax Benefits with a 1031 Exchange

    How to Calculate Your Potential Tax Benefits with a 1031 Exchange

    If you are selling an investment or business use property, you should consider a 1031 exchange. Generally speaking, a 1031 exchange allows you to defer capital gains tax at the federal and state level, depreciation recapture tax, and net investment income tax when you sell an investment or business use real estate and reinvest those proceeds into another business or investment use property. If that isn’t compelling enough, wait until you see your potential benefits by calculating your various tax totals and deferral potential.
    How to Calculate Capital Gains Tax
    Many people ask, how is Capital Gains Calculated, the Capital Gains Tax Calculation is as follows: Sales Price – the TOTAL of Original purchase price (cost basis) + improvements to the property + selling expenses = Total Capital Gains
    Federal Capital Gains Tax = Total Capital Gains multiplied either 15% or 20% depending on your annual household Income. Currently for persons married filing jointly the 20% rate would begin on income of $517,001. Remember the sale of the property itself is considered part of the income.
    State Capital Gains Tax = Total Capital Gains multiplied by your State Capital Gain Tax Rate which varies by state.

  • Is Early Release of Exchange Funds Possible Under 1031 Exchange Rules?

    Tax deferral in a proper 1031 exchange is based upon strict adherence to Internal Revenue Code Section 1031 and the Regulations pertaining to that Code section.  In fact, there is a distinct emphasis of form over substance throughout the Regulations, and consequently there is no exception when it comes to the early release of funds. It is not sufficient for a taxpayer to change their mind in regards to a 1031 exchange and to state they are willing to pay the taxes in full on their gain. Logic suggest that this should be allowed, but unfortunately the IRS has not chosen to follow this commonsense practice. Only under specific circumstances are the early release of funds possible once a 1031 exchange is underway. 
    Possible Reasons for Not Completing an Exchange
    Failure to Identify within 45-day Period
    The Regulations state “The agreement may provide that if the taxpayer has not identified replacement property by the end of the identification period, the taxpayer may have rights to receive… money…at any time after the end of the identification period”. The most common reason that a taxpayer may not identify replacement property within the 45 day window is because the taxpayer did not find any property that was not to his satisfaction. The taxpayer may decide on a date prior to the 45 day date that she has not found anything to her liking, and she wishes to terminate the exchange, receive a return of her funds and pay the taxes otherwise due when someone sells rather than exchanges. Under other circumstances, a taxpayer can have every intention to identify replacement property within the 45-day period but may have fallen ill or had her home damaged in some type of catastrophe. Unfortunately, these good faith reasons to identify after the end of the identification period are not recognized in the Regulations. This may seem harsh, but short of the taxpayer’s location or the property’s location being in a https://www.irs.gov/newsroom/tax-relief-in-disaster-situations”>federal… disaster area, the IRS does not make exceptions. Failure to identify replacement property within the 45-day period means your exchange will be closed on day 46 and funds will be released, you will have to report and pay taxes on the full gains. 
    Failure to Acquire within the 180 day Exchange Period 
    The Regulations further state: “An agreement limits a taxpayer’s rights as provided in this paragraph (g)(6) only if the agreement provides that the taxpayer has no rights, except as provided in paragraphs (g)(6)(ii) and (g)(6)(iii) of this section, to receive …money… before the end of the exchange period. 
    Once one or more properties are identified the taxpayer needs to wait until she has received all the properties she is entitled to based on the identification.  Should she choose to terminate the exchange before the end of the 180 day exchange period and pay full taxes, that cannot be done.
      
    When Early Release of Funds is Allowable under the Regulations
    Funds can only be released within the 180-day exchange period if one of the following occurs:

    (A) The receipt by the taxpayer of all of the replacement property to which the taxpayer is entitled under the exchange agreement, or
    (B) The occurrence after the end of the identification period of a material and substantial contingency that –
    (1) Relates to the deferred exchange,
    (2) Is provided for in writing, and
    (3) Is beyond the control of the taxpayer and of any disqualified person (as defined in paragraph (k) of this section), other than the person obligated to transfer the replacement property to the taxpayer

    An example of (A) is when a taxpayer identifies only one replacement property within the 45-day period, acquires the property after that period and still has additional cash in the exchange account.  Since there are no more possible replacement properties, the funds can be returned. Those excess funds can be distributed after the sale closed on the replacement property, and the taxpayer will recognize gain only on that sum. However, if a taxpayer identifies two possible replacement properties, purchases just one and has funds left over because there is a still one available replacement property and funds remaining the funds will need to sit until the 180-day exchange period is through. Often, the Qualified Intermediary will suggest that the taxpayer make clear in the identification period that he only intends to buy one of the two properties.  In this case, once the first property is acquired, excess funds can be paid back to the taxpayer after the replacement property sale closes.
    In an example of circumstance (B), a Purchase and Sale Agreement for replacement property might contain a contingency providing that the taxpayer will need to obtain a zoning variance for the transaction to go ahead.  Failure to obtain it would be a valid reason to terminate the exchange.  Short of these limited exceptions, the Regulations do not provide the ability to terminate the exchange on demand, despite the taxpayer being willing to pay the applicable taxes due in the absence of a completed exchange.
    IRS Provides Clarity in Private Letter Ruling PLR200027028
    Prior to the Private Letter Ruling, it was generally assumed that termination of the exchange on demand was possible as long as the taxpayer was willing to pay full taxes due.  The ability to terminate could not be part of a valid exchange agreement without tainting valid exchanges, however the exchange agreement could be amended to provide for this early distribution.
    The IRS settled this uncertainty by the issuance of

  • Is Early Release of Exchange Funds Possible Under 1031 Exchange Rules?

    Tax deferral in a proper 1031 exchange is based upon strict adherence to Internal Revenue Code Section 1031 and the Regulations pertaining to that Code section.  In fact, there is a distinct emphasis of form over substance throughout the Regulations, and consequently there is no exception when it comes to the early release of funds. It is not sufficient for a taxpayer to change their mind in regards to a 1031 exchange and to state they are willing to pay the taxes in full on their gain. Logic suggest that this should be allowed, but unfortunately the IRS has not chosen to follow this commonsense practice. Only under specific circumstances are the early release of funds possible once a 1031 exchange is underway. 
    Possible Reasons for Not Completing an Exchange
    Failure to Identify within 45-day Period
    The Regulations state “The agreement may provide that if the taxpayer has not identified replacement property by the end of the identification period, the taxpayer may have rights to receive… money…at any time after the end of the identification period”. The most common reason that a taxpayer may not identify replacement property within the 45 day window is because the taxpayer did not find any property that was not to his satisfaction. The taxpayer may decide on a date prior to the 45 day date that she has not found anything to her liking, and she wishes to terminate the exchange, receive a return of her funds and pay the taxes otherwise due when someone sells rather than exchanges. Under other circumstances, a taxpayer can have every intention to identify replacement property within the 45-day period but may have fallen ill or had her home damaged in some type of catastrophe. Unfortunately, these good faith reasons to identify after the end of the identification period are not recognized in the Regulations. This may seem harsh, but short of the taxpayer’s location or the property’s location being in a https://www.irs.gov/newsroom/tax-relief-in-disaster-situations”>federal… disaster area, the IRS does not make exceptions. Failure to identify replacement property within the 45-day period means your exchange will be closed on day 46 and funds will be released, you will have to report and pay taxes on the full gains. 
    Failure to Acquire within the 180 day Exchange Period 
    The Regulations further state: “An agreement limits a taxpayer’s rights as provided in this paragraph (g)(6) only if the agreement provides that the taxpayer has no rights, except as provided in paragraphs (g)(6)(ii) and (g)(6)(iii) of this section, to receive …money… before the end of the exchange period. 
    Once one or more properties are identified the taxpayer needs to wait until she has received all the properties she is entitled to based on the identification.  Should she choose to terminate the exchange before the end of the 180 day exchange period and pay full taxes, that cannot be done.
      
    When Early Release of Funds is Allowable under the Regulations
    Funds can only be released within the 180-day exchange period if one of the following occurs:

    (A) The receipt by the taxpayer of all of the replacement property to which the taxpayer is entitled under the exchange agreement, or
    (B) The occurrence after the end of the identification period of a material and substantial contingency that –
    (1) Relates to the deferred exchange,
    (2) Is provided for in writing, and
    (3) Is beyond the control of the taxpayer and of any disqualified person (as defined in paragraph (k) of this section), other than the person obligated to transfer the replacement property to the taxpayer

    An example of (A) is when a taxpayer identifies only one replacement property within the 45-day period, acquires the property after that period and still has additional cash in the exchange account.  Since there are no more possible replacement properties, the funds can be returned. Those excess funds can be distributed after the sale closed on the replacement property, and the taxpayer will recognize gain only on that sum. However, if a taxpayer identifies two possible replacement properties, purchases just one and has funds left over because there is a still one available replacement property and funds remaining the funds will need to sit until the 180-day exchange period is through. Often, the Qualified Intermediary will suggest that the taxpayer make clear in the identification period that he only intends to buy one of the two properties.  In this case, once the first property is acquired, excess funds can be paid back to the taxpayer after the replacement property sale closes.
    In an example of circumstance (B), a Purchase and Sale Agreement for replacement property might contain a contingency providing that the taxpayer will need to obtain a zoning variance for the transaction to go ahead.  Failure to obtain it would be a valid reason to terminate the exchange.  Short of these limited exceptions, the Regulations do not provide the ability to terminate the exchange on demand, despite the taxpayer being willing to pay the applicable taxes due in the absence of a completed exchange.
    IRS Provides Clarity in Private Letter Ruling PLR200027028
    Prior to the Private Letter Ruling, it was generally assumed that termination of the exchange on demand was possible as long as the taxpayer was willing to pay full taxes due.  The ability to terminate could not be part of a valid exchange agreement without tainting valid exchanges, however the exchange agreement could be amended to provide for this early distribution.
    The IRS settled this uncertainty by the issuance of

  • Is Early Release of Exchange Funds Possible Under 1031 Exchange Rules?

    Tax deferral in a proper 1031 exchange is based upon strict adherence to Internal Revenue Code Section 1031 and the Regulations pertaining to that Code section.  In fact, there is a distinct emphasis of form over substance throughout the Regulations, and consequently there is no exception when it comes to the early release of funds. It is not sufficient for a taxpayer to change their mind in regards to a 1031 exchange and to state they are willing to pay the taxes in full on their gain. Logic suggest that this should be allowed, but unfortunately the IRS has not chosen to follow this commonsense practice. Only under specific circumstances are the early release of funds possible once a 1031 exchange is underway. 
    Possible Reasons for Not Completing an Exchange
    Failure to Identify within 45-day Period
    The Regulations state “The agreement may provide that if the taxpayer has not identified replacement property by the end of the identification period, the taxpayer may have rights to receive… money…at any time after the end of the identification period”. The most common reason that a taxpayer may not identify replacement property within the 45 day window is because the taxpayer did not find any property that was not to his satisfaction. The taxpayer may decide on a date prior to the 45 day date that she has not found anything to her liking, and she wishes to terminate the exchange, receive a return of her funds and pay the taxes otherwise due when someone sells rather than exchanges. Under other circumstances, a taxpayer can have every intention to identify replacement property within the 45-day period but may have fallen ill or had her home damaged in some type of catastrophe. Unfortunately, these good faith reasons to identify after the end of the identification period are not recognized in the Regulations. This may seem harsh, but short of the taxpayer’s location or the property’s location being in a https://www.irs.gov/newsroom/tax-relief-in-disaster-situations”>federal… disaster area, the IRS does not make exceptions. Failure to identify replacement property within the 45-day period means your exchange will be closed on day 46 and funds will be released, you will have to report and pay taxes on the full gains. 
    Failure to Acquire within the 180 day Exchange Period 
    The Regulations further state: “An agreement limits a taxpayer’s rights as provided in this paragraph (g)(6) only if the agreement provides that the taxpayer has no rights, except as provided in paragraphs (g)(6)(ii) and (g)(6)(iii) of this section, to receive …money… before the end of the exchange period. 
    Once one or more properties are identified the taxpayer needs to wait until she has received all the properties she is entitled to based on the identification.  Should she choose to terminate the exchange before the end of the 180 day exchange period and pay full taxes, that cannot be done.
      
    When Early Release of Funds is Allowable under the Regulations
    Funds can only be released within the 180-day exchange period if one of the following occurs:

    (A) The receipt by the taxpayer of all of the replacement property to which the taxpayer is entitled under the exchange agreement, or
    (B) The occurrence after the end of the identification period of a material and substantial contingency that –
    (1) Relates to the deferred exchange,
    (2) Is provided for in writing, and
    (3) Is beyond the control of the taxpayer and of any disqualified person (as defined in paragraph (k) of this section), other than the person obligated to transfer the replacement property to the taxpayer

    An example of (A) is when a taxpayer identifies only one replacement property within the 45-day period, acquires the property after that period and still has additional cash in the exchange account.  Since there are no more possible replacement properties, the funds can be returned. Those excess funds can be distributed after the sale closed on the replacement property, and the taxpayer will recognize gain only on that sum. However, if a taxpayer identifies two possible replacement properties, purchases just one and has funds left over because there is a still one available replacement property and funds remaining the funds will need to sit until the 180-day exchange period is through. Often, the Qualified Intermediary will suggest that the taxpayer make clear in the identification period that he only intends to buy one of the two properties.  In this case, once the first property is acquired, excess funds can be paid back to the taxpayer after the replacement property sale closes.
    In an example of circumstance (B), a Purchase and Sale Agreement for replacement property might contain a contingency providing that the taxpayer will need to obtain a zoning variance for the transaction to go ahead.  Failure to obtain it would be a valid reason to terminate the exchange.  Short of these limited exceptions, the Regulations do not provide the ability to terminate the exchange on demand, despite the taxpayer being willing to pay the applicable taxes due in the absence of a completed exchange.
    IRS Provides Clarity in Private Letter Ruling PLR200027028
    Prior to the Private Letter Ruling, it was generally assumed that termination of the exchange on demand was possible as long as the taxpayer was willing to pay full taxes due.  The ability to terminate could not be part of a valid exchange agreement without tainting valid exchanges, however the exchange agreement could be amended to provide for this early distribution.
    The IRS settled this uncertainty by the issuance of

  • The Same Taxpayer Requirement in a 1031 Tax Deferred Exchange

    What is the Same Taxpayer Rule in a 1031 Like-Kind Exchange?
    In a 1031 exchange, the taxpayer who owns the relinquished property must be the same taxpayer who takes ownership of the replacement property.  Keep in mind that one of the justifications for tax deferral is that a taxpayer has reported all the incidences of ownership and that the taxpayer’s basis will carry over into the new replacement property.  The taxpayer is only getting deferral, not permanent tax avoidance, and the sheltered gain will be due ultimately upon a future sale of the property without an exchange. If the taxpayer were to change tax identities within an exchange, there would be no continuity of tax ownership and no reason to afford deferral.
    In addition, the exchange regulations provide that the taxpayer must transfer the relinquished property as well as receive the transfer of the replacement property.  If, for tax purposes, the taxpayer changes its tax identity between the sale and the purchase, then the same taxpayer will not have disposed of and received property.  So, while the same taxpayer requirement will not be found by those words in the regulations, it is very clearly implicit.
    When determining what constitutes “the same taxpayer” the tax identity may be different than the legal title.  It is the tax identity that must be maintained and follow from the relinquished property ownership to the replacement property ownership.  Another way to look at this is whether the selling and buying entities use the same social security number for both properties and does it change to a Federal Tax-Identification Number (FEIN or EIN) from one property to the other. The social security number would typically be used for a single individual’s ownership, including ownership under tax disregarded entities discussed below in more detail. The FEIN number would typically be used for a business or an entity ownership consisting of more than one person or more than one entity, such as a multi-member limited liability company or a partnership.
    Can a Taxpayer Change the Ownership but Maintain the Tax Identity?
    Remember that we are talking about the tax identity, not necessarily the specific name of the title of the property.  So let’s look at some various ways in which a taxpayer can hold title that would preserve the tax identity:

    Hold title in taxpayer’s own name
    Hold title under a single member limited liability company (LLC)
    Hold title as the trustee of a Revocable Living Trust
    Hold title as beneficiary of an Illinois type land trust
    Hold title as a Tenant in Common (TIC)
    Hold title under a Delaware Statutory Trust (DST)

    Holding Title in the Taxpayer’s Own Name
    Using the taxpayer’s own name is the most common form or ownership.  This ownership can be as an individual, LLC, partnership, etc.  There is always a tax identification number associated with this ownership. 
    Holding Title as a Single Member LLC, Trustee of a Revocable Living Trust, or TIC
    Single member LLCs and Self Declarations of Trust (Living Trust) are known as “tax disregarded entities.” These entities are taxed to the party that is the sole member of the LLC or the grantor/beneficiary of the trust.  A TIC is also deemed to be owned by the owner of that Tenant in Common share.  The fact that there are other co-owners of the property has no adverse consequences to the taxpayer being the same taxpayer who sold the property individually.
    Holding Title under a Delaware Statutory Trust
    DSTs themselves are regarded as a trust, however the owner of a DST share is regarded as owning a beneficial interest in the trust.  As such, a person selling as an individual but buying through a DST interest is still treated as the same taxpayer assuming the beneficial interest is held in the same individual taxpayer’s name.  In 2004,

  • The Same Taxpayer Requirement in a 1031 Tax Deferred Exchange

    What is the Same Taxpayer Rule in a 1031 Like-Kind Exchange?
    In a 1031 exchange, the taxpayer who owns the relinquished property must be the same taxpayer who takes ownership of the replacement property.  Keep in mind that one of the justifications for tax deferral is that a taxpayer has reported all the incidences of ownership and that the taxpayer’s basis will carry over into the new replacement property.  The taxpayer is only getting deferral, not permanent tax avoidance, and the sheltered gain will be due ultimately upon a future sale of the property without an exchange. If the taxpayer were to change tax identities within an exchange, there would be no continuity of tax ownership and no reason to afford deferral.
    In addition, the exchange regulations provide that the taxpayer must transfer the relinquished property as well as receive the transfer of the replacement property.  If, for tax purposes, the taxpayer changes its tax identity between the sale and the purchase, then the same taxpayer will not have disposed of and received property.  So, while the same taxpayer requirement will not be found by those words in the regulations, it is very clearly implicit.
    When determining what constitutes “the same taxpayer” the tax identity may be different than the legal title.  It is the tax identity that must be maintained and follow from the relinquished property ownership to the replacement property ownership.  Another way to look at this is whether the selling and buying entities use the same social security number for both properties and does it change to a Federal Tax-Identification Number (FEIN or EIN) from one property to the other. The social security number would typically be used for a single individual’s ownership, including ownership under tax disregarded entities discussed below in more detail. The FEIN number would typically be used for a business or an entity ownership consisting of more than one person or more than one entity, such as a multi-member limited liability company or a partnership.
    Can a Taxpayer Change the Ownership but Maintain the Tax Identity?
    Remember that we are talking about the tax identity, not necessarily the specific name of the title of the property.  So let’s look at some various ways in which a taxpayer can hold title that would preserve the tax identity:

    Hold title in taxpayer’s own name
    Hold title under a single member limited liability company (LLC)
    Hold title as the trustee of a Revocable Living Trust
    Hold title as beneficiary of an Illinois type land trust
    Hold title as a Tenant in Common (TIC)
    Hold title under a Delaware Statutory Trust (DST)

    Holding Title in the Taxpayer’s Own Name
    Using the taxpayer’s own name is the most common form or ownership.  This ownership can be as an individual, LLC, partnership, etc.  There is always a tax identification number associated with this ownership. 
    Holding Title as a Single Member LLC, Trustee of a Revocable Living Trust, or TIC
    Single member LLCs and Self Declarations of Trust (Living Trust) are known as “tax disregarded entities.” These entities are taxed to the party that is the sole member of the LLC or the grantor/beneficiary of the trust.  A TIC is also deemed to be owned by the owner of that Tenant in Common share.  The fact that there are other co-owners of the property has no adverse consequences to the taxpayer being the same taxpayer who sold the property individually.
    Holding Title under a Delaware Statutory Trust
    DSTs themselves are regarded as a trust, however the owner of a DST share is regarded as owning a beneficial interest in the trust.  As such, a person selling as an individual but buying through a DST interest is still treated as the same taxpayer assuming the beneficial interest is held in the same individual taxpayer’s name.  In 2004,

  • The Same Taxpayer Requirement in a 1031 Tax Deferred Exchange

    What is the Same Taxpayer Rule in a 1031 Like-Kind Exchange?
    In a 1031 exchange, the taxpayer who owns the relinquished property must be the same taxpayer who takes ownership of the replacement property.  Keep in mind that one of the justifications for tax deferral is that a taxpayer has reported all the incidences of ownership and that the taxpayer’s basis will carry over into the new replacement property.  The taxpayer is only getting deferral, not permanent tax avoidance, and the sheltered gain will be due ultimately upon a future sale of the property without an exchange. If the taxpayer were to change tax identities within an exchange, there would be no continuity of tax ownership and no reason to afford deferral.
    In addition, the exchange regulations provide that the taxpayer must transfer the relinquished property as well as receive the transfer of the replacement property.  If, for tax purposes, the taxpayer changes its tax identity between the sale and the purchase, then the same taxpayer will not have disposed of and received property.  So, while the same taxpayer requirement will not be found by those words in the regulations, it is very clearly implicit.
    When determining what constitutes “the same taxpayer” the tax identity may be different than the legal title.  It is the tax identity that must be maintained and follow from the relinquished property ownership to the replacement property ownership.  Another way to look at this is whether the selling and buying entities use the same social security number for both properties and does it change to a Federal Tax-Identification Number (FEIN or EIN) from one property to the other. The social security number would typically be used for a single individual’s ownership, including ownership under tax disregarded entities discussed below in more detail. The FEIN number would typically be used for a business or an entity ownership consisting of more than one person or more than one entity, such as a multi-member limited liability company or a partnership.
    Can a Taxpayer Change the Ownership but Maintain the Tax Identity?
    Remember that we are talking about the tax identity, not necessarily the specific name of the title of the property.  So let’s look at some various ways in which a taxpayer can hold title that would preserve the tax identity:

    Hold title in taxpayer’s own name
    Hold title under a single member limited liability company (LLC)
    Hold title as the trustee of a Revocable Living Trust
    Hold title as beneficiary of an Illinois type land trust
    Hold title as a Tenant in Common (TIC)
    Hold title under a Delaware Statutory Trust (DST)

    Holding Title in the Taxpayer’s Own Name
    Using the taxpayer’s own name is the most common form or ownership.  This ownership can be as an individual, LLC, partnership, etc.  There is always a tax identification number associated with this ownership. 
    Holding Title as a Single Member LLC, Trustee of a Revocable Living Trust, or TIC
    Single member LLCs and Self Declarations of Trust (Living Trust) are known as “tax disregarded entities.” These entities are taxed to the party that is the sole member of the LLC or the grantor/beneficiary of the trust.  A TIC is also deemed to be owned by the owner of that Tenant in Common share.  The fact that there are other co-owners of the property has no adverse consequences to the taxpayer being the same taxpayer who sold the property individually.
    Holding Title under a Delaware Statutory Trust
    DSTs themselves are regarded as a trust, however the owner of a DST share is regarded as owning a beneficial interest in the trust.  As such, a person selling as an individual but buying through a DST interest is still treated as the same taxpayer assuming the beneficial interest is held in the same individual taxpayer’s name.  In 2004,

  • The Same Taxpayer Requirement in a 1031 Tax Deferred Exchange

    What is the Same Taxpayer Rule in a 1031 Like-Kind Exchange?
    In a 1031 exchange, the taxpayer who owns the relinquished property must be the same taxpayer who takes ownership of the replacement property.  Keep in mind that one of the justifications for tax deferral is that a taxpayer has reported all the incidences of ownership and that the taxpayer’s basis will carry over into the new replacement property.  The taxpayer is only getting deferral, not permanent tax avoidance, and the sheltered gain will be due ultimately upon a future sale of the property without an exchange. If the taxpayer were to change tax identities within an exchange, there would be no continuity of tax ownership and no reason to afford deferral.
    In addition, the exchange regulations provide that the taxpayer must transfer the relinquished property as well as receive the transfer of the replacement property.  If, for tax purposes, the taxpayer changes its tax identity between the sale and the purchase, then the same taxpayer will not have disposed of and received property.  So, while the same taxpayer requirement will not be found by those words in the regulations, it is very clearly implicit.
    When determining what constitutes “the same taxpayer” the tax identity may be different than the legal title.  It is the tax identity that must be maintained and follow from the relinquished property ownership to the replacement property ownership.  Another way to look at this is whether the selling and buying entities use the same social security number for both properties and does it change to a Federal Tax-Identification Number (FEIN or EIN) from one property to the other. The social security number would typically be used for a single individual’s ownership, including ownership under tax disregarded entities discussed below in more detail. The FEIN number would typically be used for a business or an entity ownership consisting of more than one person or more than one entity, such as a multi-member limited liability company or a partnership.
    Can a Taxpayer Change the Ownership but Maintain the Tax Identity?
    Remember that we are talking about the tax identity, not necessarily the specific name of the title of the property.  So let’s look at some various ways in which a taxpayer can hold title that would preserve the tax identity:

    Hold title in taxpayer’s own name
    Hold title under a single member limited liability company (LLC)
    Hold title as the trustee of a Revocable Living Trust
    Hold title as beneficiary of an Illinois type land trust
    Hold title as a Tenant in Common (TIC)
    Hold title under a Delaware Statutory Trust (DST)

    Holding Title in the Taxpayer’s Own Name
    Using the taxpayer’s own name is the most common form or ownership.  This ownership can be as an individual, LLC, partnership, etc.  There is always a tax identification number associated with this ownership. 
    Holding Title as a Single Member LLC, Trustee of a Revocable Living Trust, or TIC
    Single member LLCs and Self Declarations of Trust (Living Trust) are known as “tax disregarded entities.” These entities are taxed to the party that is the sole member of the LLC or the grantor/beneficiary of the trust.  A TIC is also deemed to be owned by the owner of that Tenant in Common share.  The fact that there are other co-owners of the property has no adverse consequences to the taxpayer being the same taxpayer who sold the property individually.
    Holding Title under a Delaware Statutory Trust
    DSTs themselves are regarded as a trust, however the owner of a DST share is regarded as owning a beneficial interest in the trust.  As such, a person selling as an individual but buying through a DST interest is still treated as the same taxpayer assuming the beneficial interest is held in the same individual taxpayer’s name.  In 2004,

  • The Same Taxpayer Requirement in a 1031 Tax Deferred Exchange

    What is the Same Taxpayer Rule in a 1031 Like-Kind Exchange?
    In a 1031 exchange, the taxpayer who owns the relinquished property must be the same taxpayer who takes ownership of the replacement property.  Keep in mind that one of the justifications for tax deferral is that a taxpayer has reported all the incidences of ownership and that the taxpayer’s basis will carry over into the new replacement property.  The taxpayer is only getting deferral, not permanent tax avoidance, and the sheltered gain will be due ultimately upon a future sale of the property without an exchange. If the taxpayer were to change tax identities within an exchange, there would be no continuity of tax ownership and no reason to afford deferral.
    In addition, the exchange regulations provide that the taxpayer must transfer the relinquished property as well as receive the transfer of the replacement property.  If, for tax purposes, the taxpayer changes its tax identity between the sale and the purchase, then the same taxpayer will not have disposed of and received property.  So, while the same taxpayer requirement will not be found by those words in the regulations, it is very clearly implicit.
    When determining what constitutes “the same taxpayer” the tax identity may be different than the legal title.  It is the tax identity that must be maintained and follow from the relinquished property ownership to the replacement property ownership.  Another way to look at this is whether the selling and buying entities use the same social security number for both properties and does it change to a Federal Tax-Identification Number (FEIN or EIN) from one property to the other. The social security number would typically be used for a single individual’s ownership, including ownership under tax disregarded entities discussed below in more detail. The FEIN number would typically be used for a business or an entity ownership consisting of more than one person or more than one entity, such as a multi-member limited liability company or a partnership.
    Can a Taxpayer Change the Ownership but Maintain the Tax Identity?
    Remember that we are talking about the tax identity, not necessarily the specific name of the title of the property.  So let’s look at some various ways in which a taxpayer can hold title that would preserve the tax identity:

    Hold title in taxpayer’s own name
    Hold title under a single member limited liability company (LLC)
    Hold title as the trustee of a Revocable Living Trust
    Hold title as beneficiary of an Illinois type land trust
    Hold title as a Tenant in Common (TIC)
    Hold title under a Delaware Statutory Trust (DST)

    Holding Title in the Taxpayer’s Own Name
    Using the taxpayer’s own name is the most common form or ownership.  This ownership can be as an individual, LLC, partnership, etc.  There is always a tax identification number associated with this ownership. 
    Holding Title as a Single Member LLC, Trustee of a Revocable Living Trust, or TIC
    Single member LLCs and Self Declarations of Trust (Living Trust) are known as “tax disregarded entities.” These entities are taxed to the party that is the sole member of the LLC or the grantor/beneficiary of the trust.  A TIC is also deemed to be owned by the owner of that Tenant in Common share.  The fact that there are other co-owners of the property has no adverse consequences to the taxpayer being the same taxpayer who sold the property individually.
    Holding Title under a Delaware Statutory Trust
    DSTs themselves are regarded as a trust, however the owner of a DST share is regarded as owning a beneficial interest in the trust.  As such, a person selling as an individual but buying through a DST interest is still treated as the same taxpayer assuming the beneficial interest is held in the same individual taxpayer’s name.  In 2004,

  • The Same Taxpayer Requirement in a 1031 Tax Deferred Exchange

    What is the Same Taxpayer Rule in a 1031 Like-Kind Exchange?
    In a 1031 exchange, the taxpayer who owns the relinquished property must be the same taxpayer who takes ownership of the replacement property.  Keep in mind that one of the justifications for tax deferral is that a taxpayer has reported all the incidences of ownership and that the taxpayer’s basis will carry over into the new replacement property.  The taxpayer is only getting deferral, not permanent tax avoidance, and the sheltered gain will be due ultimately upon a future sale of the property without an exchange. If the taxpayer were to change tax identities within an exchange, there would be no continuity of tax ownership and no reason to afford deferral.
    In addition, the exchange regulations provide that the taxpayer must transfer the relinquished property as well as receive the transfer of the replacement property.  If, for tax purposes, the taxpayer changes its tax identity between the sale and the purchase, then the same taxpayer will not have disposed of and received property.  So, while the same taxpayer requirement will not be found by those words in the regulations, it is very clearly implicit.
    When determining what constitutes “the same taxpayer” the tax identity may be different than the legal title.  It is the tax identity that must be maintained and follow from the relinquished property ownership to the replacement property ownership.  Another way to look at this is whether the selling and buying entities use the same social security number for both properties and does it change to a Federal Tax-Identification Number (FEIN or EIN) from one property to the other. The social security number would typically be used for a single individual’s ownership, including ownership under tax disregarded entities discussed below in more detail. The FEIN number would typically be used for a business or an entity ownership consisting of more than one person or more than one entity, such as a multi-member limited liability company or a partnership.
    Can a Taxpayer Change the Ownership but Maintain the Tax Identity?
    Remember that we are talking about the tax identity, not necessarily the specific name of the title of the property.  So let’s look at some various ways in which a taxpayer can hold title that would preserve the tax identity:

    Hold title in taxpayer’s own name
    Hold title under a single member limited liability company (LLC)
    Hold title as the trustee of a Revocable Living Trust
    Hold title as beneficiary of an Illinois type land trust
    Hold title as a Tenant in Common (TIC)
    Hold title under a Delaware Statutory Trust (DST)

    Holding Title in the Taxpayer’s Own Name
    Using the taxpayer’s own name is the most common form or ownership.  This ownership can be as an individual, LLC, partnership, etc.  There is always a tax identification number associated with this ownership. 
    Holding Title as a Single Member LLC, Trustee of a Revocable Living Trust, or TIC
    Single member LLCs and Self Declarations of Trust (Living Trust) are known as “tax disregarded entities.” These entities are taxed to the party that is the sole member of the LLC or the grantor/beneficiary of the trust.  A TIC is also deemed to be owned by the owner of that Tenant in Common share.  The fact that there are other co-owners of the property has no adverse consequences to the taxpayer being the same taxpayer who sold the property individually.
    Holding Title under a Delaware Statutory Trust
    DSTs themselves are regarded as a trust, however the owner of a DST share is regarded as owning a beneficial interest in the trust.  As such, a person selling as an individual but buying through a DST interest is still treated as the same taxpayer assuming the beneficial interest is held in the same individual taxpayer’s name.  In 2004,