1031 Question
Tom Cox
PHILIP P STORRER
My client has a commercial building that his daughter uses for her business. My client charges no rent and does not report the property on his tax returns. He wants to do a 1031 exchange for a large commercial property.May I assume he is holding the current building as an investment so it meets the 1031 rules?The information contained herein is confidential and may be privileged and is intended only for the individual or entity to whom it is addressed. Any unauthorized use, distribution or copying of this communication is strictly prohibited. If you have received this communication in error, please notify me immediately.
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PHILIP P STORRER
On Jul 11, 2024, at 1:50 PM, PHILIP P STORRER <psto...@comcast.net> wrote:
No, Tom… your client does not qualify.
Lee Reams
Tom,
In order to qualify for a Section 1031 exchange, the property being relinquished must be held for productive use in a trade or business or for investment. Since your client is not charging rent and is not reporting the property on his tax returns, it may be challenging to demonstrate that the property is held for investment purposes.
The IRS typically looks for evidence that the property is being used to generate income or is otherwise held for investment. In this case, since the property is being used by the client's daughter without rent and is not reported on tax returns, it may not meet the criteria for being held for investment.
To strengthen the case for a 1031 exchange, your client might consider starting to charge fair market rent and properly reporting the rental income on his tax returns. This would help demonstrate that the property is being held for investment purposes.
Lee
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Richard Job
Also, the use of the property would be considered personal since it is not rented at FMV, and personal use property is not eligible for 1031. If it was not being used you might be able to argue it was being held for investment.
Richard C. Job CPA
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