1031 Exchanged Property Timeframe

Comments(8)

• 
  edmeyer7th March, 2005

  I have been told by my Qualified Intermediaries that the IRS may frown on a chain of quick exchanges. I was told that it is not much of a problem to acquire a property and exchange it quickly. You might consider pulling cash out of the replacement property rather than exchange it immediately.
  
  Bill Exeter is one of our members who is very experienced and might be able to give you a more definitive time frame for exchanging the replacement property. His user name is wexeter.

• 
  rshivdat7th March, 2005

  Thanks so much for your reply.
  
  I have heard of taking money out, do you mean like an equity line of credit. Is there another way?
  
  Thanks.

• 
  NewKidinTown210th March, 2005

  Cash Out Refinance is the usual way.

• 
  wexeter11th March, 2005

  The real estate investor must have the INTENT to HOLD the property for rental, investment or use in a business. The investor must be able to prove that he or she did in fact have the INTENT to HOLD the property as such. The question then becomes how does one in fact prove his or her INTENT was to HOLD the property. The best way to prove the INTENT is to do just that - HOLD the property for rental or investment. The majority of tax advisors and exchange professionals - including myself - recommend a 12 month holding period in order to demonstrate the INTENT to HOLD the property. Holding the property for less than 12 months does not automatically disqualify the 1031 exchange, but it does make it more difficult to prove this INTENT during an audit. There is an article on this site entitled Holding Requirements for Relinquished and Replacement Properties that can provide much more specific information.
  [addsig]

• 
  rshivdat12th March, 2005

  Thanks very much for the information. :-D

• 
  NewKidinTown212th March, 2005

  No, depreciation taken since 1997 is still recaptured even if the property is converted to your primary residence and now qualifies for the capital gains exclusion.

• 
  smithj212th March, 2005

  I would believe that your cost basis would be reduced but by whatever you had actually depreciated. Say in your example, you rented out half for 22 years and then converted it into personal residence, you would have only depreciated 22 out of the 25 years so your cost basis would be:
  
  $50K + ($50K - $44K) = $56K
  
  Your profit would then be:
  
  $125K - $56K = $69K
  
  This is my understanding of how the tax code works. I am not a CPA so you might want to run this by a qualified accountant just to be sure.
  
  Good Luck.

• 
  smithj212th March, 2005

  Quote:
  On 2005-03-12 22:50, NewKidinTown2 wrote:
  chicago2005,
  
  .......
  
  In your example (disregarding land and salvage value), with the property sold for $125K, the investment unit profit would be $62.5K while the residence unit profit would be $12.5K. The amount of the rental unit profit that is due to depreciation taken since 1977 would be recaptured at a 25% tax rate, with the rest of the profit taxed at a 15% rate. The profit on the residence unit qualifies for the capital gains exclusion.
  
  Converting the rental unit to your primary residence allows you to qualify for the capital gains exclusion if you meet the two year rules, BUT depreciation taken since 1997 will still be recaptured at 25%.
  
  
  
  Interesting post NewKid.
  
  In your opinion then, is it profitable to depreciate an investment property if all the depreciation will be recaptured at 25%? What if you have an effective tax rate of less than 25% while taking the depreciation, will ALL the depreciation still be recaptured at 25%?
  
  Thanks,
  JS.