DEALER PROPERTY ISSUES - PROPERTY HELD FOR SALE
There is often confusion when it comes to defining what property qualifies for an exchange. Sometimes it is easier to describe situations that do not qualify. Real estate that is owned as "stock in trade or other property primarily for sale" cannot
be exchanged. This type of property is deemed to be that of a dealer,
which is held for sale to customers during the ordinary course of
business. This type of sale is taxed as ordinary income.
SUBSTANTIATING THE INVESTMENT INTENT
The defining factor for qualification for a §1031
exchange is the taxpayer's "intent" at the time of purchase. Was it the
taxpayer's intent to hold the property for investment? The burden of
substantiating intent is that of the taxpayer's. Here are some ways in
which the taxpayer may establish investment intent:
- Advertising, promotional efforts, and other activities to solicit
tenants for property can establish the intent to hold for investment.
- Conversely, advertising and promotional efforts aimed at soliciting
buyers for the sale of the property would negate the intent to hold for
- The listing of the property with brokers. Listing for rent
establishes investment intent; listing for sale establishes intent to
- The extent to which improvements, if any, were made to the
property. Improvements aimed at securing a tenant help establish
investment intent; other improvements could be argued to establish
intent to re-sell. Granted, there is a lot of gray area here.
- The frequency, number, and continuity of sales. A particular
taxpayer who buys and re-sells frequently might have difficulty
establishing intent to hold for investment.
- The ordinary course of business of the taxpayer. Is the taxpayer typically a landlord or a dealer?
CAN A "DEALER" PERFORM AN EXCHANGE?
Simply because a taxpayer re-sells property
regularly does not automatically disqualify that taxpayer from ever
benefiting from an exchange. It is good practice for a taxpayer to
separate his or her activities between entities. For instance, he or
she may establish a Sub-S corporation for dealer activities and an LLC
for longer-term hold properties. In this way, intent is easier to
establish for taxpayers involved in both worlds.
REVIEW WITH LEGAL AND/OR TAX ADVISORS
As with any aspect of exchanging, we strongly
advise all taxpayers, and particularly dealers, to discuss potential
exchanges with their trusted tax advisor and/or attorney before moving
forward with an exchange. This brief discussion only scratches the
surface of the subject covered.