1031 Exchange and Gifted Property - Part Two

(Listen Here 5:21 min)

Many People Are Unaware That You Can Conduct a 1031 Exchange of Property That You Received As a Gift.

Section 1031 Can Be Used to Defer the Tax When the Gifted Property is Sold: 

If you held the gifted property for a qualified purpose, which is for “investment purposes” or for use in your “trade or business”, then you should be able to defer the federal capital gains taxes.

Remember in a 1031, both your old property (relinquished property) and your new like-kind property (replacement property) will qualify for 1031 exchange treatment if they are considered to be “qualified use property”.  This is very important – you can safe money in federal capital gains taxes.

Proving Your Intent to Hold for a Qualified Purpose:

It is important that you intend to hold your properties for investment purposes in order to qualify for 1031 tax deferral.  This means that your property involved in the exchange must be held for investment or used in your trade or business.  If you used the property for personal use (such as your home) or held the property as inventory or stock in trade (i.e. they are held for sale), then they may not qualify for 1031 exchange.

A good way to prove that you have the proper “intent” to hold for a property for “qualified purpose” is to keep your properties for a substantial period of time, so that you can show you had the intent to hold for investment.  During this holding period you can do things with your property that are consistent with investment or business. (i.e. renting them out for market rate lease), however, there is no mandatory minimum period of time that you must own property before conducting a 1031 exchange.

If you have a few years of tax returns showing that the property was held consistent with business or investment (i.e. showing rental income, deprecation or other business expenses) you will able to prove your case much better, if you are ever audited.

About the Author:

Jeff Peterson (AKA: "Professor 1031") is a Qualified Intermediary and Serves as an Adjunct-Professor for the William Mitchell College of Law (Where He Teaches About Federal Income Tax). Jeff Works With People From All Over the USA to Save Money on Federal Capital Gains Taxes.

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