Swap Between Siblings of Inherited Land

Technical topics regarding tax preparation.
#1
Dbertke  
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Received a phone call from a client yesterday. Client and her sister inherited 50-50 interest in two parcels of farm land when their father passed away a few years back. Sister wants to sell hers but client wants to keep. Attorney that they are dealing with suggested that each sister do a Quit-Claim deed on their interest in one of the parcels, so that at the end of the the day, each sister has 100% ownership in one parcel (parcels are approximately the same size). Sister will then sell her parcel while my client continues to hold on and rent hers.

Of course when the client explained how the attorney wanted to do this, she made it sound so simple. However, I started thinking as to whether filing the Quit-Claim deeds to effectively transfer ownership of the parcels was equivalent to a 1031 exchange. Am I overthinking this?
 

#2
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A 1031 exchange has specific hoops that the client must jump through. And, there are related party rules.

I think what you're getting at is that the attorney is probably implying it's a gift, but there's quid pro quo. i.e. This for that. Which would suggest there's really a sale between the siblings and therefore gain or loss recognition.

If your client intends to rent the parcel(s), is there enough cash flow after expenses to pay a 50% loan to value mortgage? If yes, I'd suggest that your client obtain a mortgage on both parcels (50% cash to value) for which only your client is liable and use that cash to buy out the sibling. Then, your client keeps both of pop's parcels and wholly owns them with no tax recognition for your client.
 

#3
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It's about as simple a 1031 exchange as you can get. Just record two deeds.

As a practical matter the sister who wants to sell will have to pay some tax on the post-death appreciation when she sells, but the related party rules will have minimal effect on the bottom line.

The planning is complete. Don't spend any more time on this.
Steve
 

#4
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I would take a look at the related party rules that Man mentions. I don't deal with 1031 much, but when I read 1031(f)(1) it seems to me that the exchange would be taxable if the sale takes place within 2 years of the exchange.
 

#5
Wiles  
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Yes, you may have a potential related party / 2-year issue since the one sister is cashing out, but as long as there is no basis shifting or tax avoidance, then your client should be OK.

See article regarding PLR 200706001: https://www.bakermckenzie.com/-/media/f ... sc_lang=en
 

#6
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The downside risk is that the exchange is taxable because the intent is to promptly sell; and thus there would be a new holding period, possibly converting 1/2 of the post-exchange appreciation to STCG.
Steve
 


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