1031 exchange

islander10 · 03-24-2006, 08:58 AM

Hi,
We have a place on the lake. We built it so if and when we sell, the capital gains tax would kill us.
I know that we could claim it as our primary residence but that is about 3 years away. Even then we would have to wait two years after selling our home.
We bought the land and then built knowing that it would appreciate. Isn't that an investment? It has done better than our 401k! I have a mainland property I am interested in but could not buy without using the funds from the sale of the the cottage.
Thanks for any info.

Woodsy · 03-24-2006, 09:19 AM

Islander,

I am no tax expert, but...

I think you can refi the cottage and take the equity out to fund the mainland purchase. Then sell your primary residence and rent for a couple of years until your ready to move to the lake. This will also clear the time frame for cap gains.

I suggest you consult a tax attorney.

Woodsy

jrc · 03-24-2006, 09:29 AM

Since the money involved is substantial, get a tax accountant's advice before proceeding.

Eventually you will have to pay the taxes on the gain. But if you can do 1031 exchange you can defer gain until you sell the next house or the one after that and maybe you can delay them until you're gone.

Here is the IRS short answer on 1031

http://www.irs.gov/businesses/small/...=98491,00.html

At Samoset condos, someone sold their two bedroom condo to me and bought a three bedroom. They avoid capital gains taxes by using a 1031.

The transaction was tricky. They had to use a special 1031 service. I'm not sure of all the details but the theme is that it is an exchange. So during the transaction you must always own exactly one of the properties. You can't sell, wait a day then buy.

Even if you can do a 1031, today the max long term capital gains tax is only 15%. So you may want to take the gain now. If congress goes to the Democrats in November, they may not renew the temporary Bush tax cuts. So you could defer the taxes for a few years and find out the tax rates have increased.

ITD · 03-24-2006, 10:12 AM

Quote:

Originally Posted by jrc

Even if you can do a 1031, today the max long term capital gains tax is only 15%. So you may want to take the gain now. If congress goes to the Democrats in November, they may not renew the temporary Bush tax cuts. So you could defer the taxes for a few years and find out the tax rates have increased.

Thank you George W. Bush. I wouldn't be making any transactions based on the Dems taking congress in November the only poll the counts is the election and I wouldn't bet my future on the news polls.

I went through one of these transactions on a business property a few years ago. One of my partners handled it so I wasn't real close to it. There are firms who specialize in this but you want to make sure they are reputable and you should have a good attorney. Worked for us but did involve some cost.

Paugus Bay Resident · 03-24-2006, 10:31 AM

Here's a company we've used http://www.ipx1031.com (Patricia Flowers)

MAXUM · 03-24-2006, 11:27 AM

This is a fascinating question, one which I have great interest in as I am getting close to the point of considering investing in property to help diversify my asset holdings a bit.

OK now can somebody explain the tax liability here to me? I was always under the impression that if you had a piece of property, sold it and purchased another, provided I were to plow all the proceeds from the first sale into the second how is there a gain realized and therefore taxible? I could see if you were punching out and putting that money in the bank... or is this handled different becuase it's a secondary property?

camp guy · 03-24-2006, 11:41 AM

Several posters suggested using a good tax attorney, and, quite frankly, this renders all further discussion moot. There are too many personal variables to find the solution on the web. Historically, money rolled over was money protected, but that isn't quite the case anymore, and the dollar amount exemption varies, too, and the personal income bracket, etc., etc., and so forth, get the idea ! Good luck to you, as a matter of fact, you are not alone in this situation - many shorefront owners (me included) have been there.

Blue Thunder · 03-24-2006, 01:19 PM

Islander10 and Maxum,

As others have stated, get some professional advice. You will find a wealth of information on the web, but still, get the sound advice of a professional. I just did a 1031 exchange with an Island property. I had realized huge gains on the one I built and needed that as a platform to jump up to the next level. If you can do it, a 1031 exchange is the way to go. As others have stated, you're only deferring the taxes until "later" but with proper structuring you might not have to be the one to worry about it. Maxum, you're right, you can only use the capital gains exemption on your primary residence. Good Luck.

Blue Thunder

onthebay · 03-24-2006, 01:56 PM

*****Disclaimer**** Yes I will be talking to a tax professional but am interested in the forums thoughts and opinions.

I have a question on what is considered an investment property? I have owned a condo on the lake as a vacation home (no rental history). If I sell it, I pay capital gains even though it was probably one of my best investments. I assume this is not eligible for a 1031.
If I were to begin renting, when would it become eligible ?

I am currently building a house on the lake and was planning on selling my primary house in Mass. Take the capital gain exemption there, move to the lake for a couple of years to take advantage of the 500K exemption when I sold. The land alone has appreciated greatly from when I bought it.
Plans change and the wife is balking at moving to the Great White North, (wants a beach house instead) so I may list the property and sell as a spec house. Does this qualify as an investment and eligible for a 1031 exchange. Can I take the proceeds and buy the beach house as an investment?
If you decide to live in an investment property does the deferred gain become due immediately?

Blue Thunder · 03-24-2006, 02:35 PM

Onthebay,

I'll take advantage of the fact you posted the ***disclaimer***.

Unless you were going to "exchange" the condo for a "like kind" property, you would have to pay the gains. If you choose to show some rental income on your 2005 tax return, that helps you make the case for "investment property". Or keep the condo and either rent it out or show income that you did.

As to your second question, the Lake/Spec house, in my opinion, would qualify as an "exchange" for the beach house as they are "like kind". Plus the fact that you probably would never move into the Lake/Spec house which would bolster your case as an investment. All of these words in quotations are in the 1031 code, that's why I'm picking them out.

AGAIN...TAKE ADVANTAGE OF YOUR OWN DISCLAIMER AND CONSULT YOUR TAX PROFESSIONAL!!

Blue Thunder

jrc · 03-24-2006, 02:52 PM

Once again the "don't sue me" disclaimer, talk to a tax professional.

You don't have to rent out real estate to make it an investment. Your first, second or third home is an investment. Many people buy land and other real estate with no intention of renting it and then sell it for a profit.

Next, you have investment property, you do a 1031 exchange and now you have bigger investment property. Then you decide to move into your investment property, this should not be a taxable event. If you live there long enough (2 of the last 5 years) and you've held it for 5 years, and then you sell it, it will be your primary and the tax break kicks in. There are no tax issues until you sell it. Also since you only need to be there 2 of the last 5 years, it's possible to have two primaries for tax purposes.

This explains it better than I did:
http://www.bankrate.com/brm/news/rea...20041018a1.asp

onthebay · 03-24-2006, 04:18 PM

Thanks, that was a good article. I will take it when I go to see my "tax professional".

Based upon what I have read I could also do a 1031 on my condo and roll that into the beach house at the same time.

No, that won't work because then I won't have anyplace left on the lake.

Can I do a 1031 on the wife and trade her for a "like Kind" without paying alimony?

Just Kidding (sorta)

tis · 03-24-2006, 07:21 PM

We just did a 1031 exchange. It was very simple. We owned land and the money from the sale of the land went directly to the purchase of the new property. The new property has to be of equal or higher value. You need to hire a company who specializes in this . Maybe we just happened to get a good company but they were great. Did everything just so. We didn't even need a lawyer except to do the deeds for the new property which you would need anyway. You have 45 days to identify three properties and 180 to actually purchase one of them. Hope this helps a little. Absolutely do it!

islander10 · 03-25-2006, 08:39 PM

Thanks for all of the suggestions on the 1031. We went to look at the property on the mainland. House was beautiful, view nothing like what we are used to and the boat house is too small for our boat. Boat house is 8 ft wide and boat is 8 1/2 feet wide. I would really have to go in FAST to fit!!!

Guess we will stay where we belong. Thanks again for all the help.

03-24-2006, 08:58 AM	#1
islander10 Junior Member Join Date: Apr 2005 Location: Sleepers/Florida Posts: 17 Thanks: 2 Thanked 0 Times in 0 Posts	1031 exchange Hi, We have a place on the lake. We built it so if and when we sell, the capital gains tax would kill us. I know that we could claim it as our primary residence but that is about 3 years away. Even then we would have to wait two years after selling our home. We bought the land and then built knowing that it would appreciate. Isn't that an investment? It has done better than our 401k! I have a mainland property I am interested in but could not buy without using the funds from the sale of the the cottage. Thanks for any info.

03-24-2006, 09:19 AM	#2
Woodsy Senior Member Join Date: May 2004 Location: Weirs Beach Posts: 1,949 Thanks: 80 Thanked 969 Times in 432 Posts	Islander, I am no tax expert, but... I think you can refi the cottage and take the equity out to fund the mainland purchase. Then sell your primary residence and rent for a couple of years until your ready to move to the lake. This will also clear the time frame for cap gains. I suggest you consult a tax attorney. Woodsy __________________ The only way to eliminate ignorant behavior is through education. You can't fix stupid.

03-24-2006, 11:41 AM	#7
camp guy Senior Member Join Date: Apr 2004 Location: formerly Winter Harbor, still Wolfeboro Posts: 1,135 Thanks: 284 Thanked 480 Times in 271 Posts	1031 Exchange Several posters suggested using a good tax attorney, and, quite frankly, this renders all further discussion moot. There are too many personal variables to find the solution on the web. Historically, money rolled over was money protected, but that isn't quite the case anymore, and the dollar amount exemption varies, too, and the personal income bracket, etc., etc., and so forth, get the idea ! Good luck to you, as a matter of fact, you are not alone in this situation - many shorefront owners (me included) have been there.

03-24-2006, 01:19 PM	#8
Blue Thunder Senior Member Join Date: Apr 2004 Location: Eastern MA & Frye Island/Sebago Lake, Maine Posts: 935 Thanks: 247 Thanked 323 Times in 148 Posts	Get the professional advice!! Islander10 and Maxum, As others have stated, get some professional advice. You will find a wealth of information on the web, but still, get the sound advice of a professional. I just did a 1031 exchange with an Island property. I had realized huge gains on the one I built and needed that as a platform to jump up to the next level. If you can do it, a 1031 exchange is the way to go. As others have stated, you're only deferring the taxes until "later" but with proper structuring you might not have to be the one to worry about it. Maxum, you're right, you can only use the capital gains exemption on your primary residence. Good Luck. Blue Thunder

03-24-2006, 01:56 PM	#9
onthebay Senior Member Join Date: Sep 2005 Posts: 114 Thanks: 0 Thanked 3 Times in 2 Posts	What classifies as Investment property ***Disclaimer** Yes I will be talking to a tax professional but am interested in the forums thoughts and opinions. I have a question on what is considered an investment property? I have owned a condo on the lake as a vacation home (no rental history). If I sell it, I pay capital gains even though it was probably one of my best investments. I assume this is not eligible for a 1031. If I were to begin renting, when would it become eligible ? I am currently building a house on the lake and was planning on selling my primary house in Mass. Take the capital gain exemption there, move to the lake for a couple of years to take advantage of the 500K exemption when I sold. The land alone has appreciated greatly from when I bought it. Plans change and the wife is balking at moving to the Great White North, (wants a beach house instead) so I may list the property and sell as a spec house. Does this qualify as an investment and eligible for a 1031 exchange. Can I take the proceeds and buy the beach house as an investment? If you decide to live in an investment property does the deferred gain become due immediately?

03-24-2006, 09:29 AM	#3
jrc Senior Member Join Date: Apr 2004 Location: NH Posts: 2,689 Thanks: 33 Thanked 439 Times in 249 Posts	Since the money involved is substantial, get a tax accountant's advice before proceeding. Eventually you will have to pay the taxes on the gain. But if you can do 1031 exchange you can defer gain until you sell the next house or the one after that and maybe you can delay them until you're gone. Here is the IRS short answer on 1031 http://www.irs.gov/businesses/small/...=98491,00.html At Samoset condos, someone sold their two bedroom condo to me and bought a three bedroom. They avoid capital gains taxes by using a 1031. The transaction was tricky. They had to use a special 1031 service. I'm not sure of all the details but the theme is that it is an exchange. So during the transaction you must always own exactly one of the properties. You can't sell, wait a day then buy. Even if you can do a 1031, today the max long term capital gains tax is only 15%. So you may want to take the gain now. If congress goes to the Democrats in November, they may not renew the temporary Bush tax cuts. So you could defer the taxes for a few years and find out the tax rates have increased.

03-24-2006, 10:31 AM	#5
Paugus Bay Resident Senior Member Join Date: Sep 2003 Location: Gilmanton, NH Posts: 754 Thanks: 136 Thanked 92 Times in 51 Posts	Here's a company we've used http://www.ipx1031.com (Patricia Flowers)

03-24-2006, 11:27 AM	#6
MAXUM Senior Member Join Date: Apr 2004 Location: Kuna ID Posts: 2,755 Thanks: 246 Thanked 1,942 Times in 802 Posts	This is a fascinating question, one which I have great interest in as I am getting close to the point of considering investing in property to help diversify my asset holdings a bit. OK now can somebody explain the tax liability here to me? I was always under the impression that if you had a piece of property, sold it and purchased another, provided I were to plow all the proceeds from the first sale into the second how is there a gain realized and therefore taxible? I could see if you were punching out and putting that money in the bank... or is this handled different becuase it's a secondary property?

03-24-2006, 02:35 PM	#10
Blue Thunder Senior Member Join Date: Apr 2004 Location: Eastern MA & Frye Island/Sebago Lake, Maine Posts: 935 Thanks: 247 Thanked 323 Times in 148 Posts	Onthebay, I'll take advantage of the fact you posted the *disclaimer*. Unless you were going to "exchange" the condo for a "like kind" property, you would have to pay the gains. If you choose to show some rental income on your 2005 tax return, that helps you make the case for "investment property". Or keep the condo and either rent it out or show income that you did. As to your second question, the Lake/Spec house, in my opinion, would qualify as an "exchange" for the beach house as they are "like kind". Plus the fact that you probably would never move into the Lake/Spec house which would bolster your case as an investment. All of these words in quotations are in the 1031 code, that's why I'm picking them out. AGAIN...TAKE ADVANTAGE OF YOUR OWN DISCLAIMER AND CONSULT YOUR TAX PROFESSIONAL!! Blue Thunder

03-24-2006, 02:52 PM	#11
jrc Senior Member Join Date: Apr 2004 Location: NH Posts: 2,689 Thanks: 33 Thanked 439 Times in 249 Posts	Once again the "don't sue me" disclaimer, talk to a tax professional. You don't have to rent out real estate to make it an investment. Your first, second or third home is an investment. Many people buy land and other real estate with no intention of renting it and then sell it for a profit. Next, you have investment property, you do a 1031 exchange and now you have bigger investment property. Then you decide to move into your investment property, this should not be a taxable event. If you live there long enough (2 of the last 5 years) and you've held it for 5 years, and then you sell it, it will be your primary and the tax break kicks in. There are no tax issues until you sell it. Also since you only need to be there 2 of the last 5 years, it's possible to have two primaries for tax purposes. This explains it better than I did: http://www.bankrate.com/brm/news/rea...20041018a1.asp

03-24-2006, 04:18 PM	#12
onthebay Senior Member Join Date: Sep 2005 Posts: 114 Thanks: 0 Thanked 3 Times in 2 Posts	good article Thanks, that was a good article. I will take it when I go to see my "tax professional". Based upon what I have read I could also do a 1031 on my condo and roll that into the beach house at the same time. No, that won't work because then I won't have anyplace left on the lake. Can I do a 1031 on the wife and trade her for a "like Kind" without paying alimony? Just Kidding (sorta)

03-24-2006, 07:21 PM	#13
tis Senior Member Join Date: Jan 2006 Posts: 6,413 Thanks: 720 Thanked 1,381 Times in 957 Posts	We just did a 1031 exchange. It was very simple. We owned land and the money from the sale of the land went directly to the purchase of the new property. The new property has to be of equal or higher value. You need to hire a company who specializes in this . Maybe we just happened to get a good company but they were great. Did everything just so. We didn't even need a lawyer except to do the deeds for the new property which you would need anyway. You have 45 days to identify three properties and 180 to actually purchase one of them. Hope this helps a little. Absolutely do it!

03-25-2006, 08:39 PM	#14
islander10 Junior Member Join Date: Apr 2005 Location: Sleepers/Florida Posts: 17 Thanks: 2 Thanked 0 Times in 0 Posts	Thanks for all of the suggestions on the 1031. We went to look at the property on the mainland. House was beautiful, view nothing like what we are used to and the boat house is too small for our boat. Boat house is 8 ft wide and boat is 8 1/2 feet wide. I would really have to go in FAST to fit!!! Guess we will stay where we belong. Thanks again for all the help.