Transcript 1031 Exchanges: - Home - Gray Reed & McGraw P.C.

ADVANCED TOPICS
IN 1031 EXCHANGES
R EAL ESTATE TA XATION, U NI VERSI TY OF H OU STON L AW C E NTER
OC TOBER 3 0 , 2 0 14
AU S T I N C . C A R L S O N , G R AY R E E D & M CG R AW, P.C .
A C A R L S O N @ G R AY R E E D.CO M
1031 Exchange Topics
 Oil and Gas Royalties – Crooks v. Commissioner
 Construction Arrangements
 Installment Sale Rules in 1031 Exchanges
 1031 Exchanges using Taxpayer Property as Replacement Property
Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014
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Crooks v. Commissioner
Facts: Petitioners owned a farm under which oil was discovered in 1981. In
1982, petitioners conveyed all of their interest in the minerals underlying the
farm to Henry Energy Corp. in consideration for four other farms, new farm
equipment, and a one-fourth royalty interest in all oil and gas produced from
the conveyed mineral interest.
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Crooks v. Commissioner
Issues
 Sale v. Lease
 Sale with subsequent conveyance of one-fourth royalty interest
 Economic interest
 Alternative source of recovery of capital
 1031 Exchange Treatment for Farms and Farm Equipment
 Personal property v. real property
 Leasehold of 30 or more years
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Crooks v. Commissioner
Holding: …when a mineral interest is assigned for real property and the
assignor retains a right to receive a specified percentage of all oil and gas
produced for the economic life of the mineral deposit, the transaction is a
lease for Federal income tax purposes
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Construction Arrangements
Issues

What kind of 1031 problems can arise from property that is being
constructed during the exchange period?

What about property that is not finished by the end of the exchange
period?
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Construction Arrangements

Identification - The description of property must be made with as much
detail as practical.

200 Percent and Identical Property Rules – Estimated fair market value on
the date taxpayer expects to receive property. Treasury Regulations Section
1.1031(k)-1(e)(2).

“Substantially the Same” –



Small variations are disregarded.
If incomplete on day of exchange, compare to condition if completed by day of
exchange.
Additional Construction –


Paid for by Third Party – Boot
Paid for by Taxpayer - Disregarded
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Installment Sales
Issues:

Installment sale rules deem constructive receipt when cash or cash
equivalents are placed into escrow.

Installment sale rules deem constructive receipt upon receipt of a third
party’s indebtedness.
Contradictory to deferred exchange safe harbors:

Escrow account safe harbor

Qualified intermediary safe harbor
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Installment Sales
Installment Sale Rule Dispensation Requirements:
1.
Bona fide intent to enter a deferred exchange determined under a facts and
circumstances test. Treasury Regulations Section 1.1031(k)-1(j)(2)(iv).
2.
Relinquished property cannot be disqualified property. Treasury
Regulations Section 1.1031(k)-1(j)(2)(v).
3.
Time limit must be met – either end of the exchange period or when the
taxpayer has an immediate right to receive, pledge, borrow or otherwise
obtain the benefits. Treasury Regulations Section 1.1031(k)-1(j)(2)(i).
Advanced Topics in 1031 Exchanges, Real Estate Taxation, October 30, 2014
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Taxpayer Property as
Replacement Property
Example of Abuse (Rev. Proc. 2004-51)
Taxpayer transfers property it wishes to renovate to exchange accommodation
titleholder (the “EAT”), then lends to EAT funds to complete the renovation.
Taxpayer then transfers other like kind property to EAT in exchange for
renovated property. EAT then sells the other property and uses proceeds to
repay the loan.
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Taxpayer Property as
Replacement Property
Rev. Proc. 2004-51

Reverse starker safe harbor does not apply “if the taxpayer owns the
property intended to qualify as replacement property before initiating a
QEAA.”

ALSO, modified Rev. Proc. 2000-37 to say it does not apply to replacement
property held in QEAA if the property is owned by the taxpayer within the
180-day period ending on the date of transfer.
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Taxpayer Property as
Replacement Property
Unresolved Issues

Does the statutory requirement of “exchange” (plain language reading of
Section 1031(a)) bar this transaction?

Use of affiliates.


Use of affiliate outside of the 180 day window – business purpose.
Definition of the property received.
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