Transfer Ownership to Child After 1031 Exchange

[Tommy Ostendorf]

A family recently sold a duplex and purchased a new duplex using a 1031 exchange.  They would like to transfer ownership of this new duplex to their son.  Would this affect the validity of the 1031 exchange and therefore trigger a capital gain?  Is there a certain amount of time you're required to hold an exchanged property?

[Bill Exeter]

Originally posted by @Tommy Ostendorf:

A family recently sold a duplex and purchased a new duplex using a 1031 exchange.  They would like to transfer ownership of this new duplex to their son.  Would this affect the validity of the 1031 exchange and therefore trigger a capital gain?  Is there a certain amount of time you're required to hold an exchanged property?

Hi Tommy,

I'm going to have to disagree with Dave Foster above.  It is very much a 1031 Exchange issue.  The key issue is that you have the intent to exchange and then be able to prove that you had the intent to exchange and hold the replacement property for rental, investment or business use.  If you 1031 Exchange and then immediately gift the property to someone else, it would appear that there was never any intent to hold for rental/investment purposes and the 1031 Exchange could be disqualified.  The investor must be able to prove under audit that they had the intent to hold for rental/investment purposes.   The length of time is not the only way, but it is a significant way, to help demonstrate the intent to hold for investment purposes.  However, communication via email, letters, contracts, etc., is more powerful (and can be used for you or against you). 

The second issue is the gift tax issue.  If the kids "inherit" the property at death, then the kids would receive a stepped up cost basis and the taxable gain goes away.  If the kids are gifted the property, the kids receive the parents cost basis and the built up taxable gain. 

It is important to address both issues.  They need to make sure that their 1031 Exchange will hold up under audit and then they need to decide how best to transfer the property to the kids (i.e., via gift or inheritance).