How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Mark Taylor Your Own Question
Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1644
Experience:  Certified Public Accountant
93680669
Type Your Tax Question Here...
Mark Taylor is online now
A new question is answered every 9 seconds

Tax Law on 1031 Exchange: I have a trust selling a property.

Customer Question

Tax Law on 1031 Exchange: I have a trust selling a property. Some beneficiaries want to do a 1031, some don't. Three questions:1) Can a person doing an exchange elect to defer only a portion of the gain, or is it an all or nothing election? (not enough income to take advantage of itemized deductions / exemptions - but the entire gain pushes him into an overall 26% tax bracket (including state).2) If one beneficiary wants to do the exchange, one wants to invest the funds but does not want to do the exchange, and one is not eligible for the exchange (has an interest in the property already) - can the Trust go ahead and do the exchange, treating each beneficiaries piece individually on the K-1? Or, MUST the property first be distributed outside the Trust and then exchanged (I realize this would be preferable - but one beneficiary is out of the country and can't sign docs - so leaving in trust allows trustee to sign).I would be interested in any references to code or publications that help me document the proper treatment to my client.
Submitted: 4 months ago.
Category: Tax
Customer: replied 4 months ago.
PS - I realize the value of a proper answer and will tip accordingly.
Expert:  Mark Taylor replied 4 months ago.

Hi, my name is Mark. I will be happy to help you with your questions. Please give me a moment to prepare your response.

Expert:  Mark Taylor replied 4 months ago.

1) Can a person doing an exchange elect to defer only a portion of the gain, or is it an all or nothing election? (not enough income to take advantage of itemized deductions / exemptions - but the entire gain pushes him into an overall 26% tax bracket (including state).

You cannot elect to defer only a portion of the gain but you can control the amount of the gain that is deferred. You would do this by taking cash out of the deal. Cash (Boot) would need to be recognized.

Expert:  Mark Taylor replied 4 months ago.

2) If one beneficiary wants to do the exchange, one wants to invest the funds but does not want to do the exchange, and one is not eligible for the exchange (has an interest in the property already) - can the Trust go ahead and do the exchange, treating each beneficiaries piece individually on the K-1? Or, MUST the property first be distributed outside the Trust and then exchanged (I realize this would be preferable - but one beneficiary is out of the country and can't sign docs - so leaving in trust allows trustee to sign).

Let me look into a sale outside of the trust. I believe it is a similar answer but let me verify.

Customer: replied 4 months ago.
Answer 1 - Thank you - after the fact with all funds already put in - Reference appreciated - I ask because a dusty memory cell tells me in a special 1031 tax class, that you could elect to defer only a portion - there is no limitation to such - can't find an actual prohibition or case (but not a great researcher).
Answer 2) - Terrific!
Expert:  Mark Taylor replied 4 months ago.

The reason that I responded to answer 1 is that the Trust is the owner of the property. So the trust would be the one that is entering or not-entering a 1031 exchange. For part 2, I am looking to see what impact would happen if the beneficiaries held the property as tenants in common.

Expert:  Mark Taylor replied 4 months ago.

I am sure the answer is no but I thought that I would ask. Are there enough assets where the member that wants to do a 1031 exchange could receive the property and the other beneficiaries could receive their amounts from other assets?

Customer: replied 4 months ago.
Part 1 - agree - but if the "exchange trust" distributes cash to a beneficiary, that is boot. The Trust has to distribute the boot. If to an individual, exchange issues 1099 to that individual. !?
Customer: replied 4 months ago.
Your prior question - Assets - All about $60K - one in and $ significant, but ..... The real issue - a family trust designed to be a safety net for another sibling. Option - so the exchange and then distribute balance of funds to individuals - order important?
Expert:  Mark Taylor replied 4 months ago.

Sorry I had to step away from the computer.

Customer: replied 4 months ago.
Appreciate the update!
Expert:  Mark Taylor replied 4 months ago.

You can do a 1031 exchange outside of the trust with multiple owners of a property. One investor could do a 1031 exchange while the other investors take their share of the cash. The intent of the investors need to be known at the time of the sale and cannot be changed.

Customer: replied 4 months ago.
thank you. But inside the trust, then boot distributed. Again, very compelling reasons due to proximity for needing to do in trust.
Customer: replied 4 months ago.
Hi Mark - checking back on getting this topic complete - Q1 looking for references, Q2 still not answered. Thank you.
Expert:  Mark Taylor replied 4 months ago.

For Q1 the amount of gain would depend on how much cash is taken out of the transaction. The 1031 exchange needs to be done by the owner of the property. If the trust owns the property then the amount of the gain that is deferred is based on a number of factors (boot received, liabilities decrease etc.). Deferring a portion of the gain should be a relatively easy calculation. I am not sure what reference you are looking for this would be just IRC Section 1031.

Customer: replied 4 months ago.
Mark, it does not seem we are getting to an answer we can support!? There is $900K gain on the line, so need to figure out if I can advise the client to do the exchange inside the trust and if someone wants out, yes, you can distribute boot to an individual through the trust (as long as the person getting the money get's the boot - does not make sense to allocate the boot - but I am concerned the exchange could be invalidated.
Let me know - I may need to repost in the legal section.
Expert:  Mark Taylor replied 4 months ago.

I apologize. I had an emergency that came up. I will have time to look at this. If you need to repost in a legal section I understand.

Expert:  Mark Taylor replied 4 months ago.

IRC 662(b) discussed the character of the income distributed from a trust. The income should have the same character in the hands of the beneficiary as in the hands of the trust. For this purpose, the amounts shall be treated as consisting of the same proportion of each class of items entering into the computation of distributable net income as the total of each class bears to the total distributable net income of the trust unless the terms of the governing instrument specifically allocate different classes of income to different beneficiaries.

​IRC 662(b) does not allow you to specially allocate income to the beneficiaries unless specifically referenced in the trust documentation.