Question about a tax Section 1031 exchange of real estate tax?

Question

I own a 1/2 interest in a piece of land with my friend. I would like my same friend to purchase a seperate piece of land worth slightly less than my 1/2 interest. The plan is to exchange my 1/2 interest for the land my friend will purchase plus some cash boot paid to me. This way i could pay gains tax on the boot, but retain my orignal basis with the new land. Could this be construed as some sort of disguised sale or is it legal within the constraints of section 1031?

Answer 1

"This way i could pay gains tax on the boot,"

Your sentence should be "This way I could pay SOME of the gains tax WITH the boot and postpone the rest."

By the way, if the overall gain is $100,000, your tax is say, $15,000 and your boot is $10,000, all of the boot will go to pay the tax.   You have the cash, you can afford to pay it.  Your phrasing made me wonder if you thought the tax rate was 15%, you'd pay 15% of the boot....

Answer 2

Mountaineer, Matt, you may very well have a situation in which a like-kind exchange is possible, but there are a number of restrictions, and you will have to look more closely at your particular transaction.  Check out IRS Publications 544 for more details.  The property must be held for investment, not personal use, the transaction must be made through a "facilitator", and several other rules apply.  If you are in a partnership with your friend, there is another question or two.  So..the famous answer of tax people:  "it depends."

Answer 3

This sounds like a good 1031 exchange. You need to have a third party handled the transaction, and it must be done in such a way that no check is issued to you, except the "boot."  addition, if the papers are not done in the correct sequence, and recorded in the correct sequence, then IRS will invalidate the tax deferral.   In other words, you will have a surprise tax bill to pay.  I have seen that happen before. The client got the settlement attorney that goofed  pay the tax, since it was his error.