Property Held for Resale Purposes

Immediate Resale after Exchange

The George M. Bernard case, points out the danger of immediately reselling property acquired in an exchange. In Bernard, Owner held property which he desired to sell at first but later exchanged for Parcel A, with the condition that the exchange would not take place unless parcel A was sold to a third party. Owner reported the transaction as a section 1031 exchange and a subsequent sale qualifying for installment sale treatment. The Tax Court held that Parcel A had been held primarily for sale and, therefore, did not qualify for Section 1031 treatment. (For other resale examples, see Regals Realty Co. v. Commissioner, supra; Griffin v. Commissioner 49 T.C. 253 (1967), and Land Dynamics, supra.) ,

Observation: If there is a defective exchange matched with a subsequent sale
 in the same taxable year, the author questions what "tax damage," if any, has
 been done. Perhaps if the sale followed the "exchange" by less than twelve
 ( or six for the period 6/22/84 to 1/1/88} months, long term capital gains
 treatment (prior to the TRA '86) might be jeopardized or in a "worst case"
 example, the defective exchange might destroy an installment sale (453).

The nature of the holding of the property is judged from the point of view of the party to the transaction who is claiming the benefits of 1031. Thus, the fact that the taxpayer exchanges qualified property for property held by a dealer will not prevent the use of  1031, provided the taxpayer holds the new property for business or investment use. The existence of a dealer in a two-way or multiple exchange, therefore, will not jeopardize 1031 treatment for the other party, assuming all other requirements are met. (R.R. 77-297.)

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