Tax Court Rules on Two 1031 Exchange Cases – Los Angeles Income Tax Planning and Income Tax Litigator Attorney Bruce Givner

by Bruce Givner on June 18, 2013

Two recent Tax Court cases show that investment property, which may be the subject of a tax deferred exchange under IRC Section 1031, may include property that is later converted into the owner's residence or that was previously the owner's residence. A 1031 tax deferred exchange occurs when like kind properties productively used in a business or trade or held for investment are essentially exchanged. When handled properly, the transaction becomes a tax deferred exchange allowing the real property owner to defer payment of the tax on the gain. Bottom line, while the sale of real property is a taxable, a 1031 exchange is not.

In Reesink v. Commissioner, the petitioner sold a San Francisco apartment building for $1.4 million. Reesink put the sale proceeds into a single-family residence which he then tried to rent. When his rental efforts were unsuccessful, Reesink moved his family into the single-family residence. The IRS disallowed Reesink’s treatment of the sale and later purchase as a tax-deferred 1031 exchange. The Tax Court ruled that since Reesink originally held the residence out for rent, though only for eight months, the sale and purchase qualified as a 1031 exchange.

In Adams v. Commissioner, Mr. Adams purchased a personal residence for $26 thousand where he lived for many years. After he moved, he rented his San Francisco residence until he sold it for $600 thousand. The sales proceeds were then used to purchase a new residence in Eureka, California, which Adams rented to his son. Adams treated the sale of the San Francisco residence and purchase of the Eureka residence as a 1031 exchange. The IRS disagreed. The Tax Court held the exchange qualified as a 1031 transaction since the son paid fair rental value for the Eureka home.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Encino, Sherman Oaks, Tarzana, Woodland Hills, Agoura, Westlake Village, Thousand Oaks, Studio City, Burbank, Glendale, Pasadena, Bel Air, Brentwood, Pacific Palisades, Marina Del Rey, Manhattan Beach, Torrance, Irvine, Newport Beach, Las Vegas and adjacent areas. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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