In a U.S. Tax Court case entitled Click v. Commissioner, 78 T.C. 225 (1982), a taxpayer named Dollie Click exchanged with the Marriott Corp., a farm she had held for investment purposes, for two residential homes (plus some taxable boot in form of a note and cash). After the exchange was completed, Dollie Click allowed her children to live in the two homes for seven months rent-free. Her children took out property insurance on the homes and paid property taxes. Her children also made and paid for repairs and improvements to the homes.
After seven months, Dollie Click gifted the homes to her children. The U.S. Tax Court decided (which holding was affirmed by the Fourth Circuit Court of Appeals) that Dollie Click did not qualify for Section 1031 tax deferral on her (partial) exchange of the farm for the homes, because she did not intend for the homes to be held for investment or business use. It was determined that her activities were highly indicative of intent at the time of the exchange to make a gift the homes to her children.
When you conduct a 1031 exchange and receive your new like-kind replacement property, your main desire (at the time of completion of the exchange) should be to hold your like-kind replacement property for productive use in business or for investment.
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
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