Many taxpayers who are looking to do a 1031 exchange on tenancy-in-common property have questions about distributions. In Giurbino v. Franchise Tax Board, the California Board of Equalization discusses many of the concepts that would be involved in an application of section 1031 to such a transaction.
In general, the determination of whether the TIC (Tenancy-in-Common) distributions would be sustained as actual (vs. fictional) distributions would involve an assessment of the following:
- Who negotiates the sale
- Who enters into the purchase agreement
- The amount of time that passes between negotiation and consummation of the sale
- The motivation behind the distributions (whether the court thinks this was done solely to obtain a different tax outcome without changing the underlying nature of ownership)
"Substance Over Form"
In making this determination, courts apply a “substance over form” approach. Notably, some of the decisions referenced in Giurbino also took into consideration when the distribution deeds were recorded and whether there were restrictions under lending arrangements on a transfer of the property.
The IRS has also recently (in 2008) amended the partnership tax return by the addition of questions relating to the completion of like-kind exchanges and distribution of TIC interests in partnership property during the current or prior tax year. For this reason, some commentary on “drop and swap” transactions suggest waiting for a period of up to two years following distributions before completing a like-kind exchange. However, there is no particular holding period requirement, nor is there any particular holding period which would absolutely insulate the transaction from scrutiny.
- 1031 Hotline: If you have questions about earnest money deposits or other items on the closing statement in a like-kind exchange, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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