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Minnesota Supreme Court Rejects Section 1031 Exchange as Evidence of Property’s Value - Taxation News

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Tax News

Posted on: May 7, 2020

Abraham Benson and Ben Blair, both of Faegre Drinker Biddle & Reath LLP

Property tax assessors often operate under the belief that a property’s sale price represents the best indication of that property’s market value, and thus should form the basis of its next assessment. While assessors may rely on recent sale prices, courts have generally confirmed that certain types of sales are not, in themselves, valid indicators of a property’s value.

The Indiana Tax Court has previously weighed in on sale-leaseback transactions and found that those types of transactions often reflect the sale of more than just real property as they include the value of certain other economic interests; however, the Indiana Tax Court has yet to address whether a Section 1031 exchange is probative evidence of a property’s market value for property tax purposes.

In a recent decision, the Minnesota Supreme Court addressed a Section 1031 exchange and noted that this unique type of transaction provides certain tax benefits that enable property owners to defer the recognition of capital gains or losses. Therefore, absent evidence indicating that the Section 1031 exchange was at market levels, the Minnesota Supreme Court could not conclude the Tax Court properly relied on the transaction to determine the market value of the property.

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