Additional Concerns

BY HESSE. CHRISTOPHER W.

Beyond Section 1031” ( JofA, July00, page 61) was an excellent summary of some of the complexities surrounding this code section and provided practical solutions to construction and reverse exchanges. I offer two other concerns for advisers to consider:

State taxation. While California and Idaho, for example, allow a replacement of in-state property with property located outside their respective states, Oregon does not. An exchange of Oregon property for property located outside the state will be a taxable event in Oregon. Cross-border exchanges need to be reviewed to determine state taxability separate from federal.

Exchanges involving Section 1245 real property. Such property must be exchanged for real property of like-kind. In the agricultural world, this creates complexities in determining what may qualify as replacement property. For example, a controlled atmosphere storage facility for apples (which is section 1245 “other tangible property”) cannot be exchanged for vacant farm land. Since the storage facility is located on land, we have a multiasset exchange of another variety where the replacement property must contain at least as much section 1245 real property as the property relinquished. Thus, while we may acquire section 1245 real property in exchange for non-section-1245 real property, the reverse will create a taxable event.

Christopher W. Hesse, CPA
Director of Taxation
LeMaster & Daniels PLLC
Moses Lake, Washington

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