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Watch Out for Related Party Exchanges
The Tax Court has recently issued another opinion denying 1031 exchange treatment on an exchange involving related parties. In Ocmulgee Fields, Inc., 132 T.C. No. 6 (2009) the taxpayer sold appreciated property to an unrelated party, through a Qualified Intermediary. The taxpayer intended to acquire a replacement property from an unrelated party, but the deal fell through. As a result, the taxpayer acquired a property from a related entity. The Tax Court upheld the finding by the IRS that such an exchange violates the restrictions on exchanges between related parties.
The taxpayer argued that tax avoidance was not a principal purpose of the exchange because there was a business reason for the exchange. The taxpayer further argued that the swap allowed the replacement property to be reunited with an adjacent property that had been held by the taxpayer years before and that holding both properties in a single entity would yield operating efficiencies and increase the overall value of the reunited properties. The Court did not buy this story and further held that even if true, the IRS could find that tax avoidance was a principal purpose of the exchange.
The moral of this story is to be careful when purchasing replacement property from a related party. When in doubt, check with your tax advisor or the professionals at All States 1031 Exchange Facilitator, LLC.
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