1031 and Sale of Property

[Oh Baby!]

Client of mine purchased and sold a number of properties in the last few years. The first sale was structured as a 1031. I need some help with the documentation required.

In year 1 when Property A was sold and Property B was purchased (1031 exchange) is there any documentation required to be included with the personal return? all the properties were bought and sold in the taxpayer's name. There are no corporations or llc's involved.

In year 2 when property B was sold and not replaced, which form(s) are used to show the gain on the sale (should be capital gain).

Thanks for your help in advance. Although I'm doing tax work for 11 years now, none of my clients have ever dabbled in real estate.

[lsowers]

Year 1 return needs to include a Form 8824 (like kind exchange) and a Sch D if there was any gain from the transaction.

Year 2 needs the Sch D.

[jainen]

>>In year 2 when property B was sold<<

If Property B was sold such a short time after acquisition, it may not be eligible for 1031 treatment in Year 1 because it was not "held" as rental or investment property. It doesn't matter whether he used an intermediary or otherwise made it look like an exchange. He can't defer gains when he is flipping properties.

Form 8824 is the main form for reporting Section 1031, but Form 4797 or others may also be required depending on how the transaction was structured. It's not an easy form if you have never done it, and even after you figure it out it is hard to code into software. You should do some research or get some help with it.

[Burke]

In year 1 when Property A was sold and Property B was purchased (1031 exchange) is there any documentation required to be included with the personal return? all the properties were bought and sold in the taxpayer's name.

If all the properties "were bought and sold in the taxpayer's name" then I would question closely as to whether it was a qualifying 1031 exchange. The settlement statements should show the Qualified Intermediary's name on them as the TP absolutely cannot take possession of the proceeds. They go the QI and the QI purchases the new properties. There are lots of timing rules on these and other regulations. He should have all the paperwork necessary to determine this. If he just sold old properties and bought new ones himself, it is not a 1031 exchange. And a 1031 is not for dabblers. If he was buying properties and fixing them up for resale, that is ordinary income on Sche C.

[RoyDaleOne]

A Qualified Intermediary is not required for a 1031 exchange, and most 1031 exchanges do not have a QI. A QI is only required if is a deferred exchange.

[jainen]

>>A QI is only required if is a deferred exchange.<<

For many practical reasons a qualified intermediary is generally preferred. But nothing in the tax code REQUIRES it. Deferred exchanges were successfully done for decades before such a safe harbor was even mentioned in the tax code. It is still only one of several safe harbors, and traditional ways of structuring a multi-leg exchange continue to be used (especially with commercial properties, unsaleable lots, and other difficult situations).

[Burke]

In the real world, very few 1031's are simultaneous exchanges between two parties. Most are deferred, and I would not recommend attempting one without the QI safeguard.

[RoyDaleOne]

How many QI's are used in vehicle trades?

1031 covers more than real estate.

[Oh Baby!]

Thanks to everyone for their responses. I only gave "sample" terms and clearly left out many of the important details. I only was looking for form numbers and not much more. Either, way, I actually realized that for this taxpayer it would be better to just recognize the income each year that each property was sold rather then go into the 1031 world and accumulate the earnings all into one year.

This is because the TP has 4 children and on a $100K gain, most is eaten up by his standard deduction, 6 exemptions and 4 child tax credits. So what's left as really taxable is very small. But if I rolled over all his gains through a 1031 exchange ($300K in total from 3 properties) into the final year that the last property was sold then he would pay tax on most of his income because only about $60K would be taken care of via the deductions and credits. and the remaining $240K would all be taxable.

One of those instances where the typical tax planning (1031 exchange) was actually not the best advice.

[jainen]

>>if I rolled over all his gains through a 1031 exchange<<

It is not up to you. He has already done whatever he has done. If it met the requirements, 1031 treatment is mandatory. He can't elect out of it like an installment sale.