1031 exchange with complications

 

Dear 1031x:   I left you a voice mail concerning my wife's interest in a house.  She and her brother were both put on title of the parents house in 1988.  Mother passed away around 1993.  Her father passed away around 1997.  House was not appraised until this year when my wife decided she wanted to get the cash out and sell her half interest to her brother who lives in it.

 

First question..... What relationship does my wife have to this property?  She visits twice a year for 2-3 weeks at a time.  Is this a second home?  Or, is this an investment property?

 

Secondly, I've got another 18 months to retirement........We wanted to use this money to help buy our retirement home in cash.  Is there a way of doing a 1031 exchange for an investment property that we will eventually stop renting and live in 18 months from now??

 

Thirdly,  when my wife was put on title around 1988, is the point that the "step-up" would be done to establish her tax basis in the house?  What if no appraisal was done in '88.  How is all that calculated now??

 

Dear G:  Your situation is not straight forward. Here's why: 1)  If your wife received a gift of half the house from her Father during his life time then she gets a carried over basis (from her Father) and not a stepped basis.  A stepped up basis only happens if she got her interest through inheritance.   From what you tell me a carried over basis is more likely.  2) Selling to her Brother as part of a 1031 exchange is OK as long as he olds the property for two more years. 3) Is the property an investment or a second home?  This will be answered mostly by your wife's intent.  Did she intend to hold it for investment or as a second home.  Another interesting questions would be: Did she collect any rent from her brother?  If she did then an investment intent would be pretty clear.   4) To qualify for tax deferral under 1031 both old and new property must be held for investment.  After an exchange hold the new property for investment for as long as you can.  If, after buying for investment, you have an unforeseen life changing event, that alters your investment intent, then moving into the property is OK.   Having said all that I suggest that your wife do a 1031x.  I hope we can help.  Sincerely,

Steve Hickox
Attorney / President