What does a
1031 tax exchange do for you? Find Blowing Rock
Property that
works better than what you have.
1031 tax exchanges are primarily for investment property where a gain has been made. The individual wishes to defer the taxes on the gain and roll over the gain into another piece of property. In a simple world, this was and is the basis of the tax law. However, 1031s have broader implications than ever before.
 Without going into great detail -
here are some possibilities:
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Use 1031 exchange to transfer wealth. With our help there are ways to transfer large amounts of wealth, tax free to your children, over time.
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Use Reverse 1031 exchange to purchase property before you sell existing property.
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Wrinkle in tax code can aid you in combining, say, 5 properties to purchase a single property. Say you have five pieces of property scattered about a region, you wish to retire and purchase one piece of property to reduce your headaches and stream line your investments.
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Use your old property to move up. Say $600,000 worth of various property pieces is sold and you want to purchase a $2 million dollar property. A lender looks and agrees to finance. It can possibly be done through a remote entity.
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Trading Places -- You move out and have to rent out your house because you can not sell it at this time. You move to a new city or state. Now, you cannot sell the old residence because it has been rented, therefore you incur a capital gain. There is a way to avoid this situation, and it is really not all that complicated.
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Buy your retirement home in advance through a 1031 exchange and meet the requirements ahead of time with no capitol gains.
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Many times an exchange can be tailored via the existing laws and your needs.
TAX ADVANTAGES
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College Your child is headed to Appalachian State University in Boone. Is it smart to pay for room and board on campus? Why not invest in a
Blowing Rock Property and write it off?
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Second Home Say you have a rental house in Atlanta. Why not trade it for a ski lodge in Boone at Sugar or Beech Mountain that you can use for vacation and still rent out for income?
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A Home for Retirement Take a commercial piece of property or rental and complete an exchange a year or so ahead of retirement.
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New Way of Life Sell all you own, relocate and use the tax codes to assist with no capital gains taxes.
OTHER TAX EXCHANGES & ALTERNATIVES
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A section of the tax code sanctions for new use. This provides some degree of flexibility.
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Convert rental property into residence.
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Convert a family farm into parcels or offices for offspring to use. Over time "gift" the land to each offspring.
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Upgrading or diversifying is an important factor in today's world, as well as in tax-free exchanges.
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INCOME Say an inherited a house that is worth $500,000, but rents for only $25,000 per year. But a strip mall that costs $500,000 rents for $60,000 per year. What is best for the quality of life of the client is key.
The bottom line is: "Can
the performance of your investment be improved?"
***All parties from Realtor to the intermediates, tax lawyers, legal and tax experts must be completely knowledgeable. The review and development of documents for closing are essential. The IRS will disallow improperly executed exchanges, ultimately meaning capitol gains taxes.***
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Vacation Homes, Second Homes and
Timeshares—Can They Be Exchanged? |
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Capital gains deferral under Section 1031 is limited
to property “held for investment” or for “productive
use in a trade or business”. Some tax practitioners
have opined that vacation or second homes rented out
for most of the year with little or no personal use
will qualify as “held for investment” under Section
1031, while others believe that as long as the
taxpayer's personal use does not exceed the
limitations set forth under IRC Section 280A, the
property will qualify1.
Does failure to rent disqualify a property from
Section 1031 deferral?
Property held solely for appreciation qualifies as
“held for investment” under Section 1031. The
Treasury Regulations specifically define “held for
investment” as follows: Unproductive real estate
held by one other than a dealer for future use or
future realization of the increment in value is
“held for investment” and not primarily for sale.
Thus, failure to rent property is clearly not fatal
to its characterization as "held for investment"
under Section 1031.
Does personal use disqualify a property from Section
1031 deferral?
There is no definitive answer. In Private Letter
Ruling 8103117, the taxpayer owned two properties
they intended to exchange. One property was
intermittently rented out for a period of time and
then for several years thereafter not rented at all.
The second was purchased by them solely for personal
enjoyment of the community and to make a sound real
estate investment. The replacement property acquired
in the exchange was for “personal enjoyment of the
community” and “to make a sound real estate
investment”. Notwithstanding the personal use by the
taxpayer, the IRS held that no gain would be
recognized in the exchange because both the
relinquished and replacement properties were
essentially “investment” properties. Unfortunately,
the IRS provided no indication of when and how much
personal use would be disregarded under similar
circumstances.
Therefore, based on the foregoing, when a
second/vacation home is never rented and the
personal use is minor, it may qualify under Section
1031.
Timeshares.
A timeshare is generally characterized in one of two
ways: (1) the right to use a property for a
specified period of time pursuant to a contractual
timeshare agreement; or (2) actual co-ownership of a
fractional fee interest in a property – having the
right to occupy the property for a period of time
designated by agreement. Since both types of
arrangements are almost always acquired and used for
a taxpayer's personal use, it is difficult, in most
cases, to argue for qualification under Section 1031
as property held “for investment”. There may,
however, be certain situations when a fractional
ownership interest is acquired and rented to others
purely for a profit. Under those circumstances, a
timeshare may, in fact, qualify under Section 1031.
Therefore, although it appears that second/vacation
homes and timeshares may qualify in certain
circumstances under Section 1031, because of the
lack of legal precedence for this proposition,
taxpayers should be cautious in pursuing these
transactions – except upon the advice of their tax
advisor.
1 Under Section 280A property is treated as business
property (and thus depreciation deductions can be
taken) or investment property (allowing for losses
on a sale) so long as the taxpayer's personal use
does not exceed the greater of 14 days or 10% of the
number of days the property is rented at fair market
value to others.
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