1031 Exchanges and Fair Market Rent
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A U.S. Tax Court decision from earlier this year, Adams v. Commissioner, T.C. Memo 2013-7, illustrates the importance of the investor / tax payer receiving a fair market rent for their investment property. In the above case the tax payer exchanged into a replacement property that was rented at slightly below market rents to the tax payer’s son. The IRS challenged this 1031 exchange declaring it a ‘family residence’ because the son was paying below market rent.
In this case the replacement property was in poor condition at the time of the 1031 exchange, and the son, a contractor, personally made substantial repairs at his own expense and continued to live in the property for four years.
The court decided that the rent plus improvements to the property constituted ‘fair market rent’. Be warned though as it could have easily gone the other way and would have in many instances that I personally am aware of.
In Revenue Procedure 2008-16 , notice That the dwelling must be rented “at a fair rental.” Insection 4 ‘Fair Rent’ for 1031 echnage purposes is defined.
