Someone else holds title as my nominee. Who exchanges, and who is the taxpayer?

Tax follows the beneficial owner when the nominee is a genuine agent

Title on the county record is not the test. In Bollinger, a developer's lender required a corporation to hold title to apartment complexes, and a written agreement made the corporation hold title 'as Bollinger's agent for the sole purpose of securing financing'. The Court held the partnerships, not the corporation, were the owners for tax purposes.

The Court set out what makes the agency believable: 'a written agreement at the time the asset is acquired, the corporation functions as agent and not principal with respect to the asset for all purposes, and the corporation is held out as the agent and not principal in all dealings with third parties relating to the asset.' It also noted that agency law 'permits agents to be unpaid family members, friends, or associates.'

The IRS applies the same idea to land trusts. As Rev. Rul. 2004-86 describes Rev. Rul. 92-105, a trustee whose only job was to hold and transfer title was 'a mere agent', and the beneficiary kept 'direct ownership of the real property for federal income tax purposes.'

What the intermediary and the IRS will want to see

Expect the qualified intermediary to ask for the nominee agreement before it accepts you as taxpayer and the nominee as record seller. The agreement should predate the sale, ideally from the day the property was bought, and say the nominee holds title for you and acts only on your direction.

Your records should match. You should have been reporting the rent and taking the depreciation, paying the property taxes and insurance, and signing leases or management contracts as owner or through the nominee as agent. A nominee that filed returns as owner, or signed contracts as principal, undercuts the agency.

Closing paperwork should tell the same story. The W-9 and the Form 1099-S should carry your name and number as transferor, which the 1099-S guidance covers, and the settlement statement should show proceeds going to the intermediary for your exchange.

Without a genuine agency, the titleholder may be the taxpayer

If there is no written agreement, or the paperwork was created only when the sale came up, the IRS can treat the record owner as the owner. Then the nominee is the person who sold, and an exchange in your name would have a different taxpayer on each side.

That outcome can also produce a gift or a disguised transfer between you and the titleholder, especially within a family. If the relationship has been informal, have your attorney decide before closing whether to document the existing agency, deed the property to you first, or let the record owner do the exchange.

Deeding the property to you just before the sale has its own timing questions, discussed in how long to hold before a 1031, and if the titleholder is a relative, the related-party rules apply to any later transfers between you.

Worked example: a parent's house held in a son's name

Hypothetical, round numbers; run your own numbers with your CPA. A mother bought a $500,000 rental ten years ago with her own money and, for financing reasons, had it titled to her son under a signed nominee agreement dated the day of purchase. She has reported the rent and depreciation on her return ever since.

It sells for $800,000. The son signs the deed at her written direction; the mother signs the exchange agreement as taxpayer; the proceeds go to the intermediary. She identifies a DST interest and a small retail building, and buys both in her own name. Her return reports the exchange on Form 8824.

If the same family had no agreement and the son had been reporting the rent, the son would be the more likely taxpayer, and his mother's exchange would rest on an argument rather than documents.

Clean up the title on the replacement

The exchange is a natural point to end a nominee arrangement. Taking the replacement in your own name, your disregarded LLC or your revocable trust keeps the same taxpayer while removing a third party from title; see selling in your own name and buying in a revocable trust and the same-taxpayer rule.

A Delaware Statutory Trust interest is subscribed directly by the investor, so it does not need a nominee for financing; the trust carries its own loan. For land trusts specifically, see whether property in an Illinois-style land trust can be exchanged.