Like-Kind Exchange Treatment Allowed For Transfer of Farmland Held in Trust

May 21, 2009 | Roger McEowen

In recent years, “related party” transactions have been utilized to defer and/or avoid income tax.  Sometimes, the transactions have risen to the level of being abusive tax transactions according to the IRS.   Related parties may also be involved in I.R.C. §1031 exchanges.  As a result, the Congress has passed legislation and the Treasury has issued regulations designed to contain abuses of the tax-deferred exchange rules.  Much of the focus of the regulations has been on investors that attempt to shift income tax basis (called “basis swapping”) between properties that are owned by related parties so as to be able to reduce depreciation recapture and capital gain taxes that become due on sale of the property.

So, who are related parties for purposes of the tax-deferred exchange rules and, if the rules are triggered, what other restrictions apply?  In two recent Private Letter Rulings, IRS ruled that the sale of farmland within two years after a like-kind exchange between family members would not cause the other parties to the exchange to recognize gain or loss.  IRS said that the taxpayer and a trust created by a sibling of the taxpayer are not related persons under the tax-deferred exchange rules.

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