1031 exchange and principal residence

Dear 1031x.com: We have a 1031 house that we rented for 3 years and have been  remodeling for 1 year.  If we move into it this year, can we count the  past year of remodeling as a year of residence since it was not rented? We cannot give up our current house because we use it as a business  address and won't be able to have our business at the new house due to  restrictions, so if we do move over to the other house, can we still keep  our mailing address at the current residence and be able to prove that we  have moved actually to the new house?
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How do you prove that you are living at the new house to the IRS?  Is it  enough to transfer your homestead exemption and phone?  Thanks for any  advice you can offer.

 

Dear B. Brach:  The IRS says that you can only have one principal residence at a time.  It is generally the place where you spend more nights than any other place.  You cannot retroactively make a place your principal residence.  After you make a property your principal residence you must live there for two years in order to qualify for the full tax exemption under code section 121.  Let me know if you need more.  Sincerely, S.

Steve Hickox
Attorney / President

1031x.com has grown to provide many services to our clients as Castle United!
Click here:  http://www.CastleUnited.com/

1031x.com, Inc.
2120 S. Birch St.
Denver, CO 80222
303.504.0144
Toll Free 888.899.1031
Fax 303.715.1012

infox@1031xcastle.com

1031 exchange build to suit

Dear 1031x.com I have a person I will be building a building for.  They own an  acreage in Iowa.  They also own an office building in Vermont.  They want  me to build a home and a separate building on their property in Iowa.  Is  there any way for them to do an exchange from the business property sold  in Vermont for the business building to be built in Iowa to defer their  capital gains?

Dear J: The best way to accomplish this is the have the owner sell you the Iowa property for what they have in it.  You  enter into an agreement for them to buy it back from you for a set price when the building is completed.  Together you obtain construction financing on the Iowa project.  Then, when the Iowa property is within 6 months of completion, they sell Vermont and buy Iowa from you as a 1031x.  I hope we can help with this.  S.

Steve Hickox
Attorney / President

1031x.com has grown to provide many services to our clients as Castle United!
Click here:  http://www.CastleUnited.com/

1031x.com, Inc.
2120 S. Birch St.
Denver, CO 80222
303.504.0144
Toll Free 888.899.1031
Fax 303.715.1012

infox@1031xcastle.com

1031 exchange mortage in excess of value

Dear 1031x.com: 

1.  Are buyer credits (e.g., seller rent back to buyer and proration/adjustment credits) considered cash received by the taxpayer in the exchange?  If not, how do I treat these credits on Form 8824?

Regarding the property given up in the exchange:

2.  I assume the Exchanger deducts the closing costs incurred on the Schedule E for that property, not the Form 8824.

3.  During the exchange, the existing mortgage on the property was paid off.  To pay off the entire balance, the Exchanger used the proceeds from the exchange plus some of his own money.  What is the effect of such a transaction?  Are any of these items considered boot?

Dear Mr. G:  I am going to answer your question is brief.

 

1: Certain seller credits especially rent prorations, security deposits and advance property tax prorations create boot items for the seller (exchanger). 

 

2.  The expenses directly related to the sale of the property can be treated as exchange expenses and effectively reduce the sale price of the property.  It is usually better to treat these as exchange expenses rather than as operating expenses on Schedule E. 

 

3. The general rule of 1031 exchanges is that to defer all tax liability the exchanger must trade equal or up in value.  If the relinquished property had mortgage in excess of value this does not change the general rule.  Paying off mortgage in excess of value will have no direct effect on the exchange.  

 

I hope this helps.  

Steve Hickox
Attorney / President

1031x.com has grown to provide many services to our clients as Castle United!
Click here:  http://www.CastleUnited.com/

1031x.com, Inc.
2120 S. Birch St.
Denver, CO 80222
303.504.0144
Toll Free 888.899.1031
Fax 303.715.1012

infox@1031xcastle.com

record keeping 1031 construction exchange

Dear 1031x.com: What requirements, including records & documents, must a  taxpayer satisfy in a 1031 Construction Exchange (where the EAT disburses  funds to contractors)?

Dear Mr. K:  The burden of proof is always on the taxpayer to prove compliance with tax law.  There are no set rules for establishing compliance with construction exchange requirements.  Of course when we handle these every invoice is carefully logged and every disbursement corresponding to every invoice is carefully accounted for.  This is in addition to the accounting records surrounding sale of relinquished property and purchase of replacement property.  Sincerely:

Steve Hickox
Attorney / President

1031x.com has grown to provide many services to our clients as Castle United!
Click here:  http://www.CastleUnited.com/

1031x.com, Inc.
2120 S. Birch St.
Denver, CO 80222
303.504.0144
Toll Free 888.899.1031
Fax 303.715.1012

infox@1031xcastle.com

dealer or investor 1031 eligible

Dear 1031x.com: 1. Can a real estate "dealer" be involved in a 1031 Exchange?
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 2. Does the amount of time  spent in sales activities of properties  influence whether a person is a real estate "investor" or a real estate "dealer"?

Dear D:  A dealer in real estate must separate his two activities with regard to each property.  These are properties held in inventory or held for immediate resale (not 1031 eligible)  these are my properties held for investment (1031 eligible)  You can be both a dealer and an investor.  Sincerely,

Steve Hickox
Attorney / President

1031x.com has grown to provide many services to our clients as Castle United!
Click here:  http://www.CastleUnited.com/

1031x.com, Inc.
2120 S. Birch St.
Denver, CO 80222
303.504.0144
Toll Free 888.899.1031
Fax 303.715.1012

infox@1031xcastle.com

Related Party Rules--Uneven Values

Mr. Hickox, our situation is a bit confusing so I would appreciate you reading the following and answering the 3 questions.

 

G & J  and A&I  own two properties together - one-half interest each as tenants in common.  It is A & I  desire to cash out of both properties.  Property A will have a sales price of $300,000 (150,000 each) and Property B will have a sales price of $230,000 (115,000 each).

 

If property B sells first, can G & J  1031 their $115,000 and buy A & I  interest in Property A for $150,000.

 

If property A sells first, can G & J  1031 $115,000 of their $150,000 and buy A & I  interest in Property B, paying tax on the $35,000.

 

If the properties sell within 180 days of each other and we are unable to purchase one of the properties from A & I, can  we, G & J  1031 the proceeds of both sales as long as we purchase something valued at $265,000 that was identified within 45 days of the first closing and closes within 180 days of the first closing?

 

I really appreciate your help and assure you that whenever these properties close we will 1031 whatever we can using your firm's services.  Thank you for your assistance in this very complicated matter.

 

Dear J:  Related party rules in a 1031x can be rather complicated.  Can you please tell me how G&J and A&I are related?   Another strategy that you might consider is this: Decide which building you prefer to own on a longer term basis.  Swap (1031x) your 1/2 interest in the other property for their 1/2 interest in the chosen property.  Of course if you chose the smaller property you will end up still owning a small piece of the larger property or you will have to pay them cash and incur some tax liability (trade down in value).  Does that idea work for you?  Sincerely,

Steve Hickox

Attorney / President

Here's my question, and I'm afraid I know the answer . . .

 

Is there any tax advantage (increased depreciation or higher basis) to doing a 1031 exchange on: A condo rental property, originally my primary residence, purchased in 1985 for $103k (original price, purchase cost + capital improvements). Depreciated to $46k over more than 15 years as a rental property. In good condition, leasing it for $1450/month, now worth (who knows in this market?) approx. $240k. Sitting on a (refinanced to get some cash out a few years ago) $96k in principal mortgage. Barely pays to sell given the capital gains, and the incremental effect it has on all our other taxes.

 

With maintenance fees, mortgage interest, property taxes (big in NJ!), and depreciation, I show approx. $4,500 yearly cash flow with approx. $750 in declarable income.

 

Current tenant is terrific, but they move on . . .

 

 

I would love to increase the basis but not pay taxes, but that's not possible is it?

 

Any way to transfer the property to my son at some point (before my death)?

 

Dear D:  As I understand it you have $145K in current equity in your investment property.  On this equity you are earning $4,500 per year.  I calculate that to be a 3.1% rate of return.  That's too little for many investors.  If you take that equity and 1031 exchange into a larger property you could possibly increase your rate of return  on equity.  By buying a larger property you would also increase your basis.  Perhaps better for you would be this strategy:  Have your son pick out the home that he wants to live in.  You 1031 exchange into it as your investment property.  Your son pays rent to you as your tenant.  You hold it for investment for about 2 years or for as long as you need the income.  Then gift it to him.  He would get your basis in the property but if he sold it the first $250K of gain ($500K if married) would be tax excluded under the sale of principal residence tax exclusion.  In this scenario you are combining the benefits of a 1031 exchange now with the benefits of a principal residence sale (IRC section 121) later.  If this doesn't work tell me more. Sincerely, 

Steve Hickox

Attorney / President

gift, life estate, 1031 exchange

Dear Mr. Hickox:  In 1992 my Aunt gifted her home to me retaining a life estate.  Two years ago she moved into nursing home.  I am selling the property and the sale price is being divided between us.  Please advise tax consequences to us.  Thanks,

 

Dear J:  Because you received this property as a gift you start with a tax basis equal to your aunt's.  Because your aunt acquired this property long ago I am going to assign a zero basis to it.  Your  aunt moved out two years ago so her portion of the sale price will still be eligible for tax exclusion under code section 121.  Your portion of the sale price will be subject to both state and federal capital gains tax, or will be eligible for tax deferral under code section 1031 if you chose to go the route.  Sincerely, 

Steve Hickox
Attorney / President

1031x.com has grown to provide many services to our clients as Castle United!
Click here:  http://www.CastleUnited.com/

1031x.com, Inc.
2120 S. Birch St.
Denver, CO 80222
303.504.0144
Toll Free 888.899.1031
Fax 303.715.1012

infox@1031xcastle.com