Creative 1031 Exchange To Myself, Sort Of - Will It Work?

Here is the situation: My partner and I own several pieces of property (A and B) individually - one of which (property A) we'd like to sell for a gain. Can we do the following:

Property A: cost basis is 125K and we're about to sell it for 175K
Property B: cost basis of 175K

Form an LLC owned by my partner and I, 50% each. Sell or transfer Property A to the LLC for the cost basis of 100K.

At the time of sale of Property A to the third party, do a 1031 exchange. The replacement property will be Property B, owned personally. Recall the basis of the replacement property is 175K. We "sell" them in the exchange for the basis amount so that we will personally recognize no gain on Property B.

The end result is that the LLC owns property worth 175K but a basis of 100K. Partner and I get 175K in cash but recognize no gain, either from the
replacement property (Property B) or Property A. Instead, our basis in Property B is reduced by 75K, thus deferring our gain until later.

Now I know what you are going to say: we are related parties. But the definitions I've read say related parties are if you own "more than" 50% of the corp/partnership that you are dealing with. I would be only a 50% owner.

Thoughts?

No, you buyer must be an unrelated 3rd party for a 1031 exchange. Seek the advice of a professional lawyer or CPA for further details.

Look up the self dealing rules.

I'll be the cross-contry-length owner... LOL

I suppose if you have someone you really trust...

No, it will not work.

You are correct in that related parties would be entities where you own more than a 50% interest.

However, the structure was crafted specifically for tax evasion, so that would be your first hurdle. There is no economic substance or benefit behind the transaction except to avoid taxes.

Also, when you contribute property to a partnership you typically contribute it at fair market value. It appears that you are contributing it at a lower value for tax avoidance purposes.

The overriding guideline here is that the purpose of the transaction is tax avoidance, so the IRS would collapse the overall structure as a "step" transaction to avoid tax and then tax you accordingly.

It is the old adage, "if it seems to good to be true, it is probably tax avoidance."

[addsig]

crafted specifically for tax evasion..

Tell us how you REALLY feel about it!!!