1031 Exchanges & Charitable Contributions

1031 Exchange & Charity

Many people want to exchange out of their current real property investments, and into like properties that may eventually be transferred to a charity. In this article, we will discuss how to do such a 1031 exchange successfully.

Motivation to Exchange Property

The initial reason for exchanging investment property may be motivated by a desire to:

  1. get out of a toxic type of property that has potential environmental liability;
  2. sell while the property values are high (at the top of the bubble);
  3. get out of management intensive properties;
  4. get out of low-income properties and into higher yielding properties;
  5. diversify into different types of real estate, or into different geographic locations.

After completing the 1031 exchange, the taxpayer must continue to hold the replacement property for a qualified purpose of investment or business purposes for a substantial period of time (the longer the better). The Internal Revenue Service has successfully challenged 1031 exchanges where the taxpayers did not hold the replacement properties for a qualified purpose and made gifts shortly after completing the exchanges. See the Click v. Commissioner, 78 T. C. 225, 231 (1982) case

Gifting to Charity

Once they have held the replacement property for the requisite time period, they may later wish to make an inter vivos gift of the replacement property directly to a charity (while they are alive), put their replacement property into a charitable remainder trust, or provide for it to be transferred upon their death to a charity (through estate planning such as a revocable living trust).

  • 1031 Hotline: If you have questions about 1031 exchanges and charity, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.

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