CES Exchange Structures & Strategies 2 — Questions and Answers
Question 1: What is a 'tenant-in-common' (TIC) interest and how can it be used in a 1031 exchange?
- A TIC interest represents sole ownership — it cannot be used in a 1031 exchange
- A TIC interest is an undivided fractional interest in real property that qualifies as like-kind replacement property (Correct answer)
- A TIC interest is a debt instrument secured by real property
- TIC interests can only be used in improvement exchanges
Correct answer: A TIC interest is an undivided fractional interest in real property that qualifies as like-kind replacement property
A tenant-in-common interest is an undivided fractional ownership in real property and qualifies as like-kind replacement property in a 1031 exchange.
Question 2: What is a Delaware Statutory Trust (DST) and why is it used as replacement property in 1031 exchanges?
- A DST is a mutual fund that invests in real estate investment trusts
- A DST is a trust structure that holds real property and issues beneficial interests that qualify as like-kind replacement property (Correct answer)
- A DST is a legal entity that replaces the QI in complex exchanges
- A DST is a short-term government trust used for parking exchange funds
Correct answer: A DST is a trust structure that holds real property and issues beneficial interests that qualify as like-kind replacement property
A DST holds real property and issues beneficial interests to investors; under IRS Rev. Rul. 2004-86, these interests qualify as like-kind replacement property.
Question 3: A taxpayer wants to use exchange proceeds to purchase a vacation home that they will occasionally use personally. Is this a qualifying replacement property?
- Yes, any real property qualifies
- No, property used personally does not qualify unless it meets the investment use test (Correct answer)
- Yes, if the property is rented for at least 60 days per year
- No, vacation homes are permanently excluded from 1031 exchanges
Correct answer: No, property used personally does not qualify unless it meets the investment use test
A vacation home must meet specific requirements (held for investment, rented at fair market value, limited personal use) to qualify — personal use alone disqualifies it.
Question 4: Under Rev. Proc. 2008-16, a dwelling unit acquired in a 1031 exchange qualifies for personal use conversion if it has been held for at least how long?
- 6 months
- 12 months
- 24 months (Correct answer)
- 36 months
Correct answer: 24 months
Rev. Proc. 2008-16 provides a safe harbor where a dwelling unit must be held for at least 24 months after the exchange before converting to personal use.
Question 5: In a 1031 exchange involving a multi-asset property (e.g., a motel with furniture), how are the personal property components treated after the TCJA?
- The full motel value qualifies for 1031 exchange treatment
- Personal property components are excluded from 1031 exchange treatment and may be taxable (Correct answer)
- Personal property components receive a 5-year deferral period
- The IRS allows a 10% personal property exception
Correct answer: Personal property components are excluded from 1031 exchange treatment and may be taxable
After TCJA, personal property (furniture, fixtures, equipment) within a multi-asset property no longer qualifies for 1031 exchange treatment and may trigger taxable gain.
Question 6: What is an 'umbrella partnership REIT' (UPREIT) and how does it relate to 1031 exchanges?
- An UPREIT is a type of QI used for large institutional exchanges
- An UPREIT allows property owners to contribute property in exchange for operating partnership units, which is an alternative to a 1031 exchange (Correct answer)
- An UPREIT is a Delaware Statutory Trust that qualifies as replacement property
- An UPREIT is a government-approved exchange structure for commercial properties only
Correct answer: An UPREIT allows property owners to contribute property in exchange for operating partnership units, which is an alternative to a 1031 exchange
An UPREIT allows property owners to contribute property to a REIT's operating partnership in exchange for OP units — while not a 1031 exchange itself, it is a related tax-deferral strategy.
CES Exchange Structures & Strategies 2
What is a 'tenant-in-common' (TIC) interest and how can it be used in a 1031 exchange?