Rhode Island 1031 Exchange Attorneys

Rhode Island 1031 Exchange Planning

SBilodeau Capalbo, LLC’s Rhode Island 1031 exchange attorneys represent property owners, investors, and businesses in the legal aspects of real estate exchanges. We assist with purchase and sale agreements, exchange cooperation provisions, assignments, ownership questions, title matters, financing documents, and closing coordination.

Selling investment real estate can create an opportunity to acquire property that better fits your business or investment plans. A properly structured Section 1031 exchange may allow you to defer recognition of gain while continuing your investment in qualifying real estate. Whether a transaction qualifies depends on the property, the taxpayer’s purpose in holding it, the ownership arrangement, the handling of proceeds, and compliance with the applicable exchange requirements.

To discuss a proposed transaction, call 401-300-4055 or contact Bilodeau Capalbo, LLC.

How a Rhode Island 1031 Exchange Works

Section 1031(a)(1) of the Internal Revenue Code provides for nonrecognition of gain or loss when qualifying real property held for business use or investment is exchanged for like-kind real property to be held for those purposes.

The property transferred is commonly called the relinquished property. The property acquired is called the replacement property.

Qualifying property may include rental houses, multifamily buildings, commercial real estate, business premises, and land held for investment. The statute excludes real property held primarily for sale. A property used solely as a personal residence also does not satisfy the business or investment requirement.

Current Section 1031 treatment applies to qualifying real property. Equipment, ordinary partnership interests, securities, and other nonqualifying assets do not become eligible simply because they are transferred with a building or used in a real estate business.

The transaction must also constitute an exchange under the applicable rules. An ordinary sale followed by reinvestment of the proceeds does not automatically qualify.

Deferral Carries Tax Consequences Into the Replacement Property

A qualifying exchange generally postpones recognition of gain. The replacement property ordinarily carries forward the relinquished property’s adjusted basis, subject to the adjustments required by the exchange basis rules.

Consequently, the replacement property’s purchase price does not automatically become its tax basis. The basis calculation can affect depreciation deductions and the gain or loss associated with a later disposition.

The anticipated tax treatment should be evaluated before the transaction closes, including whether full deferral, partial deferral, or loss nonrecognition will result.

Investment Intent Must Be Supported by the Facts

The taxpayer’s actual purpose in holding the property is central to Section 1031 eligibility. The description used in the purchase agreement or exchange documents does not settle that question.

Rental advertisements, communications with prospective tenants, leases, rental payments, personal occupancy, renovation plans, and the timing of later decisions can all bear on whether the property was acquired and held for investment.

Two Tax Court decisions illustrate how the evidence can produce different results.

Reesink and Goolsby Show Why Actual Conduct Matters

In Reesink v. Commissioner, T.C. Memo. 2012-118, 2012 WL 1392733, at *5–6, the taxpayers advertised the replacement property for rent and showed it to prospective tenants. They did not use it recreationally before eventually moving into it, and their decision to sell their existing residence came months after the replacement-property acquisition. The court concluded: “we hold that petitioners held the Laurel Lane property with investment intent at the time of the exchange.”

In Goolsby v. Commissioner, T.C. Memo. 2010-64, 2010 WL 1253012, at *3–4, the taxpayers moved into replacement property within two months, had considered personal occupancy before acquiring it, and made only limited efforts to rent it. The court stated: “We are unpersuaded that petitioners held the Pebble Beach property for investment or for productive use in a trade or business at the time of the exchange.”

The parties in Goolsby agreed that the timing and qualified-intermediary requirements had been satisfied. The contested issue was investment intent. The decision therefore demonstrates that procedural compliance does not independently establish qualifying use.

These cases do not create a fixed waiting period after which a taxpayer may safely move into replacement property. The contemporaneous purpose and supporting evidence remain important.

Renting Replacement Property to a Family Member

A family relationship does not, by itself, resolve whether property is held for investment.

In Adams v. Commissioner, T.C. Memo. 2013-7, 2013 WL 135103, at *7, the taxpayer rented replacement property to his son and the son’s family. The court considered the rental payments together with the family’s substantial renovation, maintenance, and repair responsibilities and found that the arrangement reflected fair rental value.

The court stated: “We find that Adams bought the Eureka house ‘for investment’ within the meaning of section 1031(a)(1).” It upheld the investment character of the exchange while requiring recognition of gain attributable to boot.

A proposed rental to a relative should therefore be evaluated through the actual lease terms, rental value, payments, services, and use of the property. Purchasing replacement property from a related person raises additional issues under the separate related-party exchange rules.

The Property Rights Being Exchanged Must Be Like-Kind

Like-kind real estate does not have to be identical in appearance, improvements, or use. Qualifying rental property, commercial property, and unimproved investment land may satisfy the requirement when the other elements of the exchange are met.

The analysis nevertheless concerns the legal interests actually transferred.

In Peabody Natural Resources Co. v. Commissioner, 126 T.C. 261, 273 (2006), the Tax Court explained that “exchanges of real property interests are not, ipso facto, like-kind exchanges under section 1031.” Relevant considerations included title, duration, the parties’ rights, and the nature or character of their interests.

The court ultimately held that the coal mine, subject to the inseparable supply contracts involved in that transaction, was like-kind to the gold mining property transferred. Id. at 279. The decision illustrates why the actual rights associated with property require examination.

Ground Leases and Limited-Duration Interests

Ground leases and other interests of limited duration require particular attention.

In VIP’s Industries Inc. v. Commissioner, T.C. Memo. 2013-157, 2013 WL 3184624, at *4–5, the taxpayer transferred a leasehold with 21 years and four months remaining and received fee interests in replacement properties. The court concluded that “petitioner’s leasehold interest was not of like kind to a fee interest under section 1031.”

The court also considered the treatment of the improvements at the end of the ground lease. The term, renewal rights, ownership of improvements, and other provisions affecting the interest conveyed can therefore be significant.

A transaction involving leaseholds, development rights, mineral interests, or other specialized property rights should be evaluated under the rules applicable to those interests.

Establish the Exchange Arrangement Before Sale Proceeds Are Received

A deferred exchange ordinarily involves transferring the relinquished property before receiving the replacement property. The arrangement must address both the required transfers and the taxpayer’s access to exchange funds.

Treasury Regulation § 1.1031(k)-1 provides a safe harbor for transactions using an eligible qualified intermediary under a written exchange agreement.

The agreement must expressly restrict the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of money or other property held by the intermediary, subject to the applicable rules.

The intermediary must satisfy the eligibility requirements. The taxpayer and disqualified persons cannot serve in that role. Certain prior agency relationships, including specified relationships with attorneys, accountants, brokers, and other professionals, can affect eligibility.

Actual and Constructive Receipt

If the taxpayer actually or constructively receives the full consideration for the relinquished property before receiving qualifying replacement property, the transaction constitutes a sale rather than a deferred exchange.

Constructive receipt concerns access to or control over funds, even when the taxpayer has not physically deposited the money into a personal account. An ordinary escrow arrangement does not automatically establish compliance with the exchange rules.

The agreements, assignments, notices, and closing instructions should establish how the funds will be handled before the relinquished property closes.

Direct Deeds and Contract Assignments

A qualified intermediary does not necessarily have to appear as the record owner in every qualifying transaction. The regulations recognize certain assignment and direct-deeding arrangements.

Those arrangements require appropriate documentation and notices. The parties should understand who is assigning contractual rights, who will deliver the deed, who will receive funds, and what written acknowledgments are required.

Bilodeau Capalbo, LLC assists with the legal documents and closing obligations while coordinating with the client’s intermediary and tax adviser.

Rhode Island 1031 Exchange Deadlines and Property Identification

For an ordinary deferred exchange, Section 1031(a)(3) establishes two principal deadlines.

The periods overlap. The taxpayer does not receive an additional 180 days after the 45-day identification period ends.

The tax-return deadline can shorten the available exchange period. An appropriate filing extension may be necessary to preserve the full 180 days, but extending the return does not ordinarily extend the exchange beyond 180 days.

The IRS Form 8824 instructions explain these requirements. The transaction calendar should also account for financing, inspections, title objections, tenant documentation, and other closing conditions.

A private agreement to extend a purchase contract does not, by itself, extend the federal exchange deadline.

Identification Must Be Written and Specific

Replacement-property identification generally must be signed, unambiguous, and timely sent to a permitted recipient, such as the qualified intermediary. Keeping a private list or discussing possibilities with a broker is insufficient.

The identification rules provide several approaches:

• Under the three-property rule, the taxpayer may identify up to three properties regardless of their aggregate fair market value.
• Under the 200% rule, the taxpayer may identify additional properties if their aggregate fair market value does not exceed twice the aggregate fair market value of the relinquished property, calculated under the regulation.
• If those limits are exceeded, the 95% exception imposes a demanding acquisition requirement tied to the aggregate value of the identified properties.

The applicable rule should be selected before identification is delivered. The replacement property actually received must also satisfy the regulation’s requirements concerning the property identified.

Cash, Mortgage Debt, and Partial Deferral

An exchange may qualify for partial deferral while also producing currently recognized gain.

Money or non-like-kind property received is commonly called boot. Section 1031(b) generally requires recognition of gain up to the applicable amount of money and nonqualifying property received, limited by the gain realized and subject to the governing rules.

In Barker v. Commissioner, 74 T.C. 555, 568 (1980), the Tax Court explained: “The presence of boot in a like-kind exchange does not disqualify the transaction from section 1031 tax-free treatment.”

The amount of taxable gain still requires calculation. Boot is not itself the amount of the tax bill.

Mortgage Payoffs Require More Than Comparing Purchase Prices

Debt relief can affect recognized gain. Liabilities relieved, liabilities assumed, additional cash contributed, and the actual flow of funds must be considered.

Barker permitted netting in a specific arrangement in which cash was contractually required to satisfy the relinquished property’s mortgage contemporaneously with the exchange. Id. at 572–73. The taxpayer could not retain that money for unrestricted use.

That holding does not mean all cash received can be offset against additional debt assumed. The contracts and movement of funds matter.

Similarly, purchasing replacement property for an equal or greater price does not independently establish full deferral. The client’s tax adviser should evaluate the entire transaction, including adjusted basis, cash distributions, debt treatment, transaction expenses, and applicable depreciation-related rules.

Preserve the Replacement Property’s Basis Calculation

In Bundren v. Commissioner, T.C. Memo. 2001-2, 2001 WL 12665, at *3–4, the Tax Court applied carryover basis, boot, and the relevant adjustments to determine replacement-property basis.

The court explained:

“Consequently, petitioners’ adjusted basis in the 116th East Ave. property immediately after the exchange was: (1) Petitioners’ carryover basis in the 84th Street property immediately before the exchange, decreased by (2) any money (boot) they received in the exchange, and adjusted for (3) any gain or loss that was recognized on the exchange.”

The resulting basis affected depreciation and the loss claimed on a later sale. Acquisition records, depreciation schedules, exchange closing statements, and the final basis calculation should remain with the replacement property’s records.

Related-Party Exchanges Require Review of the Entire Arrangement

Transactions involving family members, related corporations, partnerships, and entities under common ownership can trigger additional restrictions.

Section 1031(f) includes a two-year disposition rule for certain exchanges between related persons, together with specified exceptions. Section 1031(f)(4) separately addresses transactions structured to avoid the purposes of the related-party provisions.

Holding property for two years is therefore not a universal solution to every related-party issue.

An Intermediary Does Not Eliminate Related-Party Restrictions

In Teruya Bros., Ltd. & Subsidiaries v. Commissioner, 124 T.C. 45, 53–56 (2005), an intermediary sold the taxpayer’s properties to unrelated purchasers and used the proceeds to acquire replacement properties from a related corporation.

The court denied deferral and explained: “The interposition of a qualified intermediary in these transactions cannot obscure the end result.”

Similarly, in Ocmulgee Fields, Inc. v. Commissioner, 132 T.C. 105, 120–23 (2009), the court examined the overall transaction and concluded that “the nonrecognition provisions of section 1031 do not apply to that exchange.” The asserted business reasons and use of an intermediary did not establish that the arrangement lacked a principal tax-avoidance purpose.

These decisions do not mean every transaction involving related persons fails. They establish the need to examine the relationships, transfers, proceeds, and resulting tax consequences.

Related Entities’ Tax Attributes Can Matter

In Malulani Group, Ltd. & Subsidiary v. Commissioner, T.C. Memo. 2016-209, 2016 WL 6778917, at *5, the court considered a related corporation’s use of net operating losses and denied deferral.

The court explained: “Net tax savings achieved through use of the related party’s NOLs may demonstrate the presence of a tax-avoidance purpose notwithstanding a lack of basis shifting.”

The analysis may therefore extend beyond the properties’ values and bases to the tax consequences for the related participants.

Ownership, LLCs, and Co-Owners With Different Objectives

An exchange must account for the identity of the taxpayer transferring the relinquished property and receiving the replacement property.

The legal name on the deed does not answer every federal tax question. An eligible single-member LLC may be disregarded as separate from its owner for federal income tax purposes, while an LLC taxed as a partnership or corporation presents different considerations.

An ordinary partnership interest also differs from the real estate owned by the partnership. Exchanging ownership in an entity is not generally equivalent to the entity exchanging qualifying real estate.

Before changing title, distributing property, admitting or removing members, or altering an entity’s tax classification, the proposed exchange should be reviewed.

Our business law practice addresses operating agreements, ownership rights, authority to approve transactions, and contractual obligations among owners.

When some owners want replacement property and others want cash, the legal and tax analysis should begin before the sale terms and distributions are finalized.

Reverse Exchanges and Property Improved Before Acquisition

Some transactions require replacement property to be acquired before the existing property can be transferred. Others involve construction that the taxpayer intends to include in the replacement property received.

These arrangements require attention to who owns the property at each stage.

Purchasing Before the Relinquished Property Is Sold

The safe harbor in Revenue Procedure 2000-37 addresses certain arrangements in which an exchange accommodation titleholder, or EAT, holds property under a qualified exchange accommodation arrangement.

Its requirements include a written agreement within five business days after the EAT receives ownership, applicable identification requirements, and 180-day transfer and holding limitations.

The financing, insurance, title documents, and contractual obligations should account for the EAT’s role.

Previously Owned Replacement Property Presents a Different Problem

In DeCleene v. Commissioner, 115 T.C. 457, 469–71 (2000), the taxpayer attempted to exchange existing business property for improved land he had already purchased.

Transferring title to the other party during construction did not establish a qualifying exchange because, as the court explained, “the transfer of title to WLC never divested petitioner of beneficial ownership.”

The court treated the disposition of the old property as a taxable sale. The decision illustrates why acquiring property directly and later rearranging title requires careful analysis.

Third-Party Ownership From the Outset

In Estate of Bartell v. Commissioner, 147 T.C. 140, 176–79 (2016), an exchange facilitator acquired the replacement property from the outset under an exchange arrangement.

The court held that “Bartell Drug’s disposition of the Everett property and acquisition of the Lynnwood property in 2001 qualify for nonrecognition treatment pursuant to section 1031.”

The transaction began before the IRS safe harbor applied to it, and the court’s analysis involved Ninth Circuit precedent. Bartell does not establish a general extension of the 180-day safe harbor for a new transaction.

The intended structure and applicable requirements should be identified before title is acquired.

Construction Must Fit the Exchange Structure and Schedule

In an improvement exchange, an appropriately structured arrangement may permit construction while the replacement property is held by an EAT.

The identification must address the property and contemplated improvements. Qualifying property must be received within the applicable exchange period. Construction completed after the taxpayer receives the property does not become part of the real estate received in that exchange.

An unfinished project does not necessarily invalidate the entire transaction, but anticipated construction expenditures cannot simply be counted as completed replacement-property value.

The firm’s construction law practice addresses related obligations involving construction agreements, payment, completion, defective work, and delays.

Rhode Island Income Tax and Closing Requirements

Federal qualification and Rhode Island closing requirements should be addressed together.

For resident individuals, R.I. Gen. Laws § 44-30-12 defines Rhode Island income by reference to federal adjusted gross income, subject to the modifications listed in that statute.

The statute does not provide a specific add-back for gain deferred under Section 1031. Rhode Island therefore generally follows federal nonrecognition treatment for qualifying exchanges in determining a resident individual’s personal income tax.

The taxpayer’s residence, entity classification, source of income, and applicable state adjustments still require consideration. This personal income-tax framework should not be treated as a determination of every tax or filing obligation associated with the transaction.

Nonresident Withholding Documentation

A nonresident selling Rhode Island real estate must address the state’s withholding procedures.

Under Rhode Island’s nonresident real estate withholding regulation, a seller claiming qualifying Section 1031 treatment must make the required gain election even when no withholding is due.

The Division of Taxation’s instructions call for submission of the election and certificate materials 20 days before closing. They also require intermediary contact information for a claimed exchange and a remittance filing when the withholding amount is zero.

The current nonresident withholding forms and instructions should be included in the closing plan.

Title, Financing, and Property Obligations

An exchange does not resolve liens, easements, lease obligations, financing conditions, zoning restrictions, environmental concerns, or defects in title.

Our commercial real estate practice addresses acquisitions, dispositions, financing, leasing, development, and related disputes. The review concerns both the exchange arrangement and the property rights the client will own after closing.

Contract Terms for a Rhode Island 1031 Exchange

The purchase and sale agreement should address the parties’ actual exchange obligations.

Depending on the transaction, the legal review may include:

• Permission to assign contractual rights to an intermediary or accommodation titleholder.
• Written notices and acknowledgments of assignments.
• The cooperation required from the other party.
• Responsibility for additional exchange expenses.
• Closing dates, extension rights, and the conditions attached to an extension.
• Whether a party must undertake additional liability or hold title to other property.
• Proposed releases or indemnification provisions benefiting an intermediary.
• The effect of an unsuccessful exchange on the parties’ obligations to close.

A general statement that a party “intends to complete a 1031 exchange” does not answer those questions.

Bilodeau Capalbo, LLC’s real estate transaction practice includes drafting and negotiating agreements, reviewing assignments and financing documents, and addressing closing obligations.

The Agreements Must Reflect the Actual Business Arrangement

In Parkway Gravel, Inc. v. Commissioner, T.C. Memo. 2024-59, 2024 WL 2292228, at *12–13, the Tax Court examined an option agreement involving a related development business.

The court considered the work performed, the risks assumed, and the effect on the parties’ economic positions. It found that “substantial, nontax purposes motivated the Option Agreement” and respected the arrangement.

The nature of the Section 1031 exchange itself was not contested in that case. The decision illustrates the importance of genuine contractual rights and documented business activity; it does not replace the separate statutory requirements for an exchange.

Document the Transfers and Preserve the Exchange File

The exchange file should establish what property was transferred, what replacement property was received, what consideration was paid, and how the transaction was completed.

In Zurn v. Commissioner, T.C. Memo. 2012-132, 2012 WL 1656288, at *7–10, the Tax Court rejected claimed exchanges after examining incomplete and inconsistent records. The court found that the taxpayer “failed to establish that he acquired like-kind property.”

The file should therefore retain executed contracts, exchange agreements, identification notices, assignments, deeds, closing statements, intermediary records, and evidence of funds transferred. Construction records and ownership documents may also be necessary.

The IRS requires reporting a like-kind exchange on Form 8824, including an exchange in which no gain or loss is recognized. The client’s tax adviser should receive the records needed to calculate basis, determine any recognized gain, and complete the applicable reporting.

Representation From Ryanna T. Capalbo and Andrew R. Bilodeau

Bilodeau Capalbo, LLC combines real estate transaction work with experience in the disputes that can arise from contracts, ownership arrangements, financing, and construction.

Ryanna T. Capalbo

Partner Ryanna T. Capalbo practices in real estate litigation, civil litigation, creditor’s rights, and appellate matters. Her experience includes property boundary disputes, adverse possession claims, contract drafting and review, LLC member disputes, and shareholder disputes.

Attorney Capalbo has also represented lenders in foreclosures, workouts, and bankruptcy matters, together with business clients in transactional and litigation matters. Her practice encompasses the agreements, ownership interests, and financial relationships associated with real estate and business assets.

Andrew R. Bilodeau

Managing Partner Andrew R. Bilodeau, Esq., MBA practices in real estate disputes, business and commercial litigation, construction law, condominium litigation, and business transactions.

He combines more than two decades of legal practice with over 30 years of entrepreneurial and business experience. His background includes business operations, financing, corporate governance, and contract negotiations. Attorney Bilodeau earned his MBA from Northeastern University’s D’Amore-McKim School of Business.

Rhode Island 1031 Exchange FAQs

Is there a minimum number of months I must hold the property?

There is no single holding period that establishes investment intent for every exchange. The property’s use, the taxpayer’s purpose, and the surrounding evidence matter.

Specific rules impose time requirements in particular circumstances, including related-party provisions and certain IRS safe harbors. Those requirements should not be confused with a universal holding-period rule.

Can a vacation property qualify?

A property used solely for personal purposes does not qualify. A dwelling with rental and personal use requires a more detailed analysis.

Revenue Procedure 2008-16 provides a safe harbor involving a 24-month ownership period before the exchange for relinquished property and after the exchange for replacement property. During each applicable 12-month period, the dwelling must be rented at a fair rental for at least 14 days, and personal use must not exceed the greater of 14 days or 10% of the days rented at a fair rental.

That safe harbor has its own requirements. It does not establish that every property held for two years qualifies.

Can replacement property be located outside Rhode Island?

Yes. Qualifying replacement real estate may be located in another U.S. state. Section 1031(h), however, provides that U.S. real estate and foreign real estate are not like-kind.

The transaction should also account for the laws and filing requirements associated with each property and the taxpayer.

Is it too late if the property is already under contract?

A signed contract does not, by itself, determine whether an exchange can still be arranged. The agreement, assignment provisions, closing status, and handling of payments require review.

The analysis changes if the property has already transferred and the taxpayer has received or obtained control over the proceeds. The intended exchange should be discussed before funds are distributed.

Can I receive some cash and still complete an exchange?

An otherwise qualifying transaction can produce partial deferral and some currently taxable gain. The amount and timing of any cash distribution should be evaluated with the tax adviser and intermediary before closing.

The applicable result depends on the entire transaction, including realized gain, nonqualifying property, liabilities, and other relevant adjustments.

Discuss Your Rhode Island 1031 Exchange With Bilodeau Capalbo, LLC

An initial consultation can begin with the property you intend to sell, the proposed replacement property, the ownership structure, and the anticipated closing dates.

Useful materials include the deed, purchase and sale agreements, leases, mortgage information, entity documents, and any proposed exchange documents. If an intermediary or tax adviser is already involved, their transaction summary and correspondence can help identify the legal work that remains.

Bilodeau Capalbo, LLC represents clients in real estate transactions throughout Rhode Island. Our attorneys assist with agreements, ownership questions, title matters, financing documents, closing coordination, and disputes affecting the transaction.

Call 401-300-4055 or contact our firm to discuss your proposed sale and replacement purchase.