by Gary Gorman Founding Partner, The 1031 Exchange Experts

The reason for this is that Revocable Living Trusts do not file income tax returns; any income or expenses, or gains or losses, are reported in the tax returns of the beneficiaries of the trust. Because the trusts don't file a return, the IRS calls them "disregarded entities". There are, currently, three types of disregarded entities: Revocable Living Trusts, Illinois Land Trusts and Single Member Limited Liability Companies. (We are hoping that Delaware Business Trusts will soon be added to the list, but that is a topic for a different article).

To understand why Living Trusts, or for that matter, the other two types of entities discussed above, do not violate the rule that title has to be the same for both the Old and New Properties, you have to look through to the actual tax return that owns each property.

Let's say, for example, that Fred and Sue Jones own the Old Property. This means that as husband and wife their joint tax return owns the property. If Fred and Sue acquire the New Property as the "Jones Revocable Living Trust" their same tax return will be acquiring the New Property since they own the trust and the trust does not file a tax return. In other words, although actually the title reads differently between the Old and New Properties, the same tax return was in title to both.

On final word of caution: the names of many trusts are different ¬ and they all have different handling in 1031 exchanges. For this reason, make sure that you are using a highly experienced and professional Intermediary and that you are discussing these issues with them as you proceed through your exchange.