Tag Archives: Related party

Some Tax-Motivated Couples Don’t Marry Under the Law, Even If They Are Bound In Their Hearts

The Supreme Court’s decision authorizing nationwide same-sex marriage further extends marital rights. But some extraordinarily-tax-motivated same-sex couples may make the same choice that some opposite-sex couples have made for years, to avoid marriage to take advantage of tax planning opportunities married couples cannot.

Marriage brings with it many tax benefits, especially under the federal income tax for families of all income levels with a single wage earner, and under the federal estate and gift tax, where even wealthy spouses are allowed unlimited tax-free transfers between themselves. But married couples are also treated as “related parties” under the Internal Revenue Code. Related party treatment prevents spouses from engaging in many tax motivated transactions that unmarried persons—even those who for all practical purposes function like a married couple—cannot.

For example, unmarried persons who co-own a corporation can more freely engage in redemption transactions in which their corporate share income tax basis offsets distribution income. Married couples are more restricted in this regard. Unmarried persons can buy and sell property between themselves free of related-party rules that re-characterize lower-tax long-term capital gain as higher-tax-rate ordinary income or prevent the purchaser from re-depreciating purchased assets. Members of unmarried couples can serve as counterparties in tax-deferred 1031 exchanges, whereas married couples are restricted in this regard.

The number of persons who would avoid marriage for tax reasons is limited. In our experience, however, some individuals—particularly those with substantial real estate holdings–take these tax planning opportunities into account when deciding whether to marry under the law, even if they are committed in their hearts. Those taxpayers turn Congressional policy on its head, causing tax laws intended to prevent abusive tax avoidance by closely connected individuals into an unintended deterrent to marriage.

E. John Wagner, II

Use New Construction on Property You Already Own for 1031 Exchange Capital Gains Tax Deferral

A 1031 Exchange is a popular capital gains deferral strategy for business and investment property. When properly implemented, a 1031 Exchange defers tax on property “sold” if the taxpayer acquires new property within a 180-day window, usually in coordination with an intermediary. Related-party rules typically prohibit use of property owned by the taxpayer or a related party as the purchased property.

A newly-released IRS ruling enables some taxpayers to circumvent the related-party rules, to indirectly use property owned by the taxpayer or a related party to complete a 1031 Exchange. This is accomplished by leasing the property to an intermediary, using the proceeds from the property “sold” for new construction, and then acquiring the newly constructed property and the leasehold, all within the 180-day exchange period.

Here is a link to the ruling: www.irs.gov/pub/irs-wd/1408019.pdf. Here is a more technical summary of the ruling:

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