Dealer Developer Issues Can
Jeopardize Your 1031 Exchange!

                                                   By Mary Lou Schwab CPA

If you participate in a number of 1031 exchanges every
year, you need to be aware of the Dealer/Developer issues. To qualify for a 1031 exchange, a taxpayer must be able to support that their “intent” at the time of purchase was to hold the property for investment. Per the I.R.S., real estate held as “stock in trade or other property primarily for sale” is excluded from the tax deferral benefits of Section 1031. Listed below are some factors the IRS may review to determine if there was intent to hold property for investment:

     • Duration of ownership, nature and purpose of the acquisition of the property.
     • Has investment income and expenses on tax returns been consistent with an investment activity. (It’s a good idea not to file Schedule C for the property or classify it as “inventory” or “held for development”. Do not use Business Activity Code 6550 referring to “Subdividers and Developers”)
     • The number, extent, continuity & materiality of the sales of real estate.
     • The length of leases, participation in rental activity, character and degree of supervision or control exercised by the taxpayer over any representatives selling the property.

A common sense approach to this potential dealer/developer problem is to avoid frequent purchases and sales or other active involvement in the real estate business. Use separate entities to segregate development and sales activities from investment holdings. Attorneys have advised dealers to form a separate entity, such as an LLC, specifically to hold title of the property that may be utilized for an exchange sometime in the future. Lastly, rely on professional advice from accountants and attorneys in structuring activities and transactions consistent with an investment motive.

©2004 Bankers Escrow Corp. Mary Lou Schwab CPA is Vice President of Bankers Escrow Corporation and oversees the 1031 Exchange Division. She has over 22 years experience in real estate taxation. For questions on 1031 exchanges call 303-986-4848 or 800-571-6595. Bankers Escrow Corporation provides qualified intermediary services for all types of exchanges including simple deferred, reverse, construction, leasehold interest and business property exchanges.