Like Kind Exchanges – Watch Out for the Personal Use “Taint”

When certain statutory identification and replacement period requirements are met, gain is not recognized on the exchange of property held for productive use in a trade or business, or for investment for property of “like kind”.  Sometimes a taxpayer’s intent (crucial to qualification of the transaction) is difficult to determine, and is typically a question of fact, the burden of proof of which always rests on the taxpayer’s shoulders.  Investment intent must be the taxpayer’s primary motivation for holding the exchanged property in order for that property to qualify under Internal Revenue Code Section 1031.

In the recent Reesink decision, the Tax Court determined that, although a married couple ultimately used the replacement property in a like kind exchange as their personal residence, they did have the requisite investment intent with respect to the property at the time they acquired it and thus did qualify for nonrecognition treatment under Section 1031.

The Court smacked down the IRS, which built its case against Reesink on concepts embodied in another Tax Court decision (Goolsby).  But the Court found several factual distinctions – in Goolsby, the taxpayers made the purchase of the replacement property contingent on the sale of their former personal residence, sought advice on whether they could move into the replacement property if renters could not be found, made minimal rental efforts, and moved in within two months of acquisition!

The Reesinks were a bit more circumspect, engaging in more extensive advertising efforts, showing the house to potential renters, and waiting almost eight months before moving in (though still a rather short period of time).

And from our “statute of limitations department” came word from on high – the U.S. Supreme Court – that an overstatement of a taxpayer’s basis in an asset (for purposes of measuring gain or loss on disposition) isn’t tantamount to omission of income.  A seemingly nitpicking question, but of great significance when it comes to the amount of time IRS has to audit a transaction.  The normal audit statute is three years, but if IRS can show significant omission of income, they get six years to come after the taxpayer.

This question has been batted around the courts (including a bunch of the circuit courts of appeal) with mixed and differing conclusions in various cases.  But now consider it settled, thanks to Home Concrete & Supply, LLC.

And in conclusion this week comes word from The Wall Street Journal that the number of folks departing the good old U.S. of A. is on the rise.  The number of Americans renouncing citizenship has grown from an average of 482 per year in the Dubya era to 1,788 in 2011.

Would Barack, perhaps, have anything to do with this picture?

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.

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