Nominee is often used to describe an entity or individual who temporarily holds title to a property on behalf of the actual owner (the taxpayer) during the process of the exchange. The use of a nominee can facilitate the exchange process, especially when multiple properties or intricate transaction timelines are involved.
A 1031 exchange, also known as a like-kind exchange, allows property owners to defer capital gains taxes by exchanging one investment property for another of “like-kind.” The process and rules for conducting a 1031 exchange can be quite intricate, and they often require the use of intermediaries or entities to help facilitate the transaction according to the regulations set by the Internal Revenue Service (IRS).
In some 1031 exchange scenarios, the nominee will take title to the property only for a short period of time, often just long enough to complete certain paperwork or transaction details. Once the necessary tasks are completed, the title is transferred from the nominee to the intended party.
However, the use of nominees in 1031 exchanges should be approached with caution and typically under the guidance of professionals familiar with the exchange process. Using a nominee improperly or without a clear understanding of the rules can lead to unintended tax consequences or failure of the exchange.