Simon, who is retired, owns Teal, Inc. stock that has declined in value since he

Question

Simon, who is retired, owns Teal, Inc. stock that has declined in value since he purchased it. He has decided either to give the stock to his nephew, Fred, who is a high school teacher, or to sell the stock and give the proceeds to Fred. Because nearly all of his wealth is invested in tax-exempt bonds, Simon is in the 15% tax bracket. If Fred receives the stock, he will sell it himself. In either case, he will use the cash or the proceeds from his sale of the stock to make the down payment on the purchase of a house. Based on a recent conversation, Simon is aware that Fred is in the 25% bracket.

Explanation / Answer

If you make a simultaneous exchange of one property for the other with cash paid or received and if there is no reduction of debt in connection with the exchange, it would be a tax-free exchange. If there is not a simultaneous exchange: from http://wwwtaxman.blogspot.com : Situation: You want to sell your property, look for a replacement property of a higher value, find a seller later and treat it as a tax-free exchange: You could sell your property for $150k, park the proceeds with an intermediary, add $50k cash to buy a $200,000 property, identify and close within the alotted time and qualify for a tax-free Section 1031 Exchange if you use a qualified intermediary.To make a tax-free exchange you can assign your sales contract to the intermediary, trade the property to the intermediary with an additional 50K, let the intermediary sell for 150K, instruct the intermediary to purchase the 200K property, and receive the replacement property from the intermediary to complete the trade. If done within the allotted time, that would qualify. A qualified intermediary is the best way to go (according to the rules to avoid a taxable transaction) unless it is truly an exchange between only 2 parties.

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