Discussion:1031 Exchange question

Please verify if the following statement is correct.

Client A made a like kind exchange with property B. It had a zero basis and was sold for 300K. With the proceeds, plus an additional 450K he purchased new property C. Accordingly, the basis for property C is 450K. He wants to take out a mortgage on the new property for 800K and then give 50% of the property only, as a gift to his son who will be responsible for 50% of the mortgage.

Please confirm if the following statements are true.

A)Being that there is no step up in basis by the gift, the basis is 225K for Client A and 225K for his son or is there a different approach?

B)Client A's liability is 400k and his sons 400K

C)Being that the property is subject to the mortgage the gift has no value and is not subject to any gift tax filing

   B)if loan is set up like that yes but chances are father takes loan out he will be        liable for full amount to bank. Son wont be on loan? If son is on loan bank will want both 100%.
   C)If mortgage equals full FMV of property no gift

I dont understand riley2 results post exchange refinance does not result in boot per my qualified intermediary literature nor does a waiting period apply to a post exchange refi. I am also missing why the timing of the gift should matter from an income tax point. So hammer away riley2. Unless there is gain due to debt relief I dont see how this will happen with a bank in the real world. bye

The Tax Court held in CLICK v. COMMISSIONER, 78 TC 225 that property received in an exchange would not qualify for 1031 treatment if it was gifted seven months after the exchange.

When encumbered property is transferred by gift to a donee, the determination of the transferor's potential income recognition depends on whether the donee is a charity. This distinction arises because different basis rules apply under Sec. 1011 to transfers of property to noncharities and charities.

Noncharitable Donees

When a taxpayer transfers property for less than its fair market value (FMV) other than in a business context, the transfer is a gift to the extent the FMV exceeds the proceeds the transferor received. (1) Thus, when a donor receives nothing in exchange for a transfer, the amount of the gift for transfer tax purposes is the property's FMV. (2) On the other hand, a gift of encumbered property is valued for gift tax purposes as the excess of the property's FMV at the time of the gift over any debt to which the property is subject. (3) The liability encumbering the property is deemed consideration paid to the transferor, resulting in a part-gift and part-sale. (4) Regs. Sec. 1.1001-1 (e) provides that on transfers of property to a noncharity that result in a part-gift and part-sale, the donor realizes income to the extent the proceeds received (i.e., the liability encumbering the property) exceed the donor's adjusted basis.

Example: D transferred a parcel of land to her son, S. At the time of the transfer, the land's FMV was $300,000; D's adjusted basis was $150,000. The land is encumbered by a $175,000 mortgage.

The transfer of the encumbered land is treated as a part-gift and part-sale. D must recognize $25,000 of income ($175,000 mortgage) less $150,000 (adjusted basis)) on the gift, because the mortgage is treated as proceeds D received. The gift is $125,000 ($300,000 FMV - $175,000 mortgage).

In your situation Mg, property C has the following, in the hands of the transferor: FMV = $375,000, Adjusted Basis = $225,000, Mortgage = $400,000

The transferor will recognize income of $175K ($400K mortgage) less $225K (adjusted basis). The value of the gift is $0 ($375K FMV - $400K mortgage).

So this transaction in total, if carried out, would result in gain to father of 75k + 175k = 250k .