Conducting a 1031 Exchange with Real Estate Held in a Trust

Many real estate investors hold their properties in trusts. Trusts are popular estate planning tools as well, and, in many cases, children and other family members will inherit real estate that is held in a trust at the time of a loved one’s death. If you have real estate held in a trust, can you sell the property in a tax-deferred like-kind exchange? Generally speaking, the answer is “Yes.” However, as there are some unique legal, practical and financial considerations involved, it is important to work closely with an experienced 1031 qualified intermediary throughout the process.

7 Important Considerations for Conducting a 1031 Exchange with Real Estate Held in Trust

What do you need to know about conducting a 1031 exchange with real estate held in a trust? Here are seven important considerations:

1. What is the Nature of the Trust?

One of the first key considerations is the nature of the trust that holds the property you intend to sell. As we discuss below, this can play a key role in determining the steps you need to take to conduct your 1031 exchange. Some common examples include:

Revocable Living Trusts
Irrevocable Trusts
Land Trusts
Delaware Statutory Trusts (DSTs)
Qualified Personal Residence Trusts (QPRTs)

In addition to determining which type of trust holds title to the property you intend to sell, it is important to make sure you address any eligibility-related concerns as well. For example, personal residences generally do not qualify for 1031 exchanges, although there are steps you can take to make a personal residence exchange-eligible.

2. Who (or What Entity) is the “Owner” of the Property?

The next key consideration is identifying the “owner” of the property you will be relinquishing in your 1031 exchange. While this might sound relatively straightforward, this isn’t necessarily the case. For example, while the trust will be deemed the owner of the property in most cases, with a revocable living trust, the person who created the trust (the “grantor”) could be deemed the owner of the property under state law. This has critical implications for conducting a 1031 exchange.

3. Who (or What Entity) Will Own the Replacement Property?

In the same vein, it is also critical to ensure that you know who (or what entity) will be deemed the owner of your replacement property. You have control over this, and your 1031 qualified intermediary can help you structure your exchange appropriately. The key is to be aware of this issue upfront so that you can address it before beginning the exchange process.

4. Are All Trust Beneficiaries On Board with the 1031 Exchange?

If the trust that owns the property you intend to sell has multiple beneficiaries (i.e., if you have business partners or you and your siblings are co-beneficiaries under a parent’s revocable living trust), it will be important to make sure that all beneficiaries are on board with the 1031 exchange. If they aren’t, you need to know this now—before you begin the exchange process. Not only can unanticipated disputes lead to unanticipated costs, but if you discover an issue after the time window to complete your 1031 exchange has opened, you could run out of time to complete the exchange, which means that you could face the full tax bill unexpectedly.

5. What Will Happen to Any “Boot” from the Transaction?

When conducting a 1031 exchange with real estate held in trust, it is important to consider what will happen with any “boot” from the transaction as well. If, for example, you are selling property held in a trust as part of the estate administration process (or after administering a loved one’s estate), boot from the transaction may need to be distributed in accordance with the terms of the trust. This could potentially have tax consequences for the trust’s beneficiaries as well.

6. Should You Consider a Delayed Exchange or Reverse Exchange?

With these considerations in mind, you may also want to consider pursuing a delayed exchange or reverse exchange. Both of these alternatives provide additional time and additional flexibility.

7. Do You Have an Experienced 1031 Qualified Intermediary Who Can Guide You Through the Process?

Finally, to ensure that you meet all applicable deadlines, avoid unnecessary tax liability and avoid any other disputes that could minimize the benefits of conducting a 1031 exchange, it is important to engage an experienced 1031 qualified intermediary who can guide you through the process. There are many ways an experienced 1031 qualified intermediary can help, and not only can engaging a qualified intermediary be necessary, but it can also be the most cost-effective option in the long run.

Schedule a Free Consultation with a 1031 Qualified Intermediary Today

If you have questions about conducting a 1031 exchange with real estate held in trust, we invite you to contact us. To schedule a free consultation at 1031 National Services, please call 888-872-1031 or request an appointment online today.