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On a property sale which 4 members have a 1/3 interest on…

On a property sale...

On a property sale which 4 members have a 1/3 interest on the sale.

Accountant's Assistant: The Accountant will know how to help. Please tell me more, so we can help you best.

Sale will not be completed until Sept. 2019 but a partial distribution of funds have been distributed in 2017. If the 1/3 share of partners are interested in a 1031 exchange when the sale is complete - should they put their portion of the 1/3 partial distribution into escrow or can they take it out cash?

Accountant's Assistant: Is there anything else important you think the Accountant should know?

One 1/3 owner of the same property was told that she had to put her share into an escrow account otherwise she would not be able to do a 1031 exchange for her 1/3 interest. We have 9 owners of the property:

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Answered in 9 minutes by:
10/28/2017
Chad EA, CFP ®
Chad EA, CFP ®, Enrolled Agent
Category: Tax
Satisfied Customers: 1,442
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
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Welcome to JustAsnwer! My name is ***** ***** I will be able to assist you today.

When the member sells (and the member does have to sell their interest) the 1/3 interest the member must adhere to the time and control guidelines set forth by the IRS.

Part of this is using a qualified intermediary and not have direct access to the funds. -Any cash taken out will have to be claimed as a capital gain or loss.

"To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction). Rather, in a deferred exchange, the disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property. Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations."

"The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties. The identification must be in writing, signed by you and delivered to a person involved in the exchange like the seller of the replacement property or the qualified intermediary. However, notice to your attorney, real estate agent, accountant or similar persons acting as your agent is not sufficient.

Replacement properties must be clearly described in the written identification. In the case of real estate, this means a legal description, street address or distinguishable name. Follow the IRS guidelines for the maximum number and value of properties that can be identified.

The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property or the due date (with extensions) of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier. The replacement property received must be substantially the same as property identified within the 45-day limit described above."

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You must report an exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred.

Form 8824 asks for:

  • Descriptions of the properties exchanged

  • Dates that properties were identified and transferred

  • Any relationship between the parties to the exchange

  • Value of the like-kind and other property received

  • Gain or loss on sale of other (non-like-kind) property given up

  • Cash received or paid; liabilities relieved or assumed

  • Adjusted basis of like-kind property given up; realized gain

If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.

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If you have any further questions please let me know.

At the conclusion of our conversation please take a moment to accept the answer by rating the answer with three stars or more.

Thank you!

Chad EA, CFP ®
Chad EA, CFP ®, Enrolled Agent
Category: Tax
Satisfied Customers: 1,442
Experience: Federally licensed IRS Enrolled Agent, Certified Financial Planner (R), MBA
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Chad EA, CFP ® and 87 other Tax Specialists are ready to help you
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Customer reply replied 4 months ago
One more question - Each 1/3 owners are of different frames of mind. If part of the owners want to cash out and part of them want the 1031 exchange option - would their share of the partial distribution in 2017 be considered "boot" and they would then pay taxes on 2017 distribution when the sales is completed in 2019??
Customer reply replied 4 months ago
No thanks on the live chat - I'm only interested in having questions on 'paper' since I am only a trustee of 1/3 portion and am dealing with 4 different persons.

Their partial distribution would be capital gains. They would have the option to defer their portion of capital gains if they used the 1031 exchange properly.

Boot would come into play if they were attempting to do a 1031 exchange and also took out or received cash

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I am more than happy to answer you follow up questions as you have them.

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