1031 Into New Primary Residence Home Office?
I am planning to sell a rental I have owned for a while. Sales price $300,000. Outstanding loan $100,000. So, for simplicity, assume I have $200,000 in net proceeds.
Incidently, I plan to purchase a new primary residence for, say $600,000. Is a three story house with a finished basement with a separate entrance.
Could I do a 1031 of the proceeds from the rental into the new primary residence if I, from day one, I use the basement as a:
a) separate rental unit that is declared on the tax return?(declaring all income, depreciation/mortgage deduction on 1/3 of full home etc)?
OR
b) home office for my business, declaring it as in a) on my tax return etc.?
Not trying to do a) or b) for the sole purpose of avoiding taxes. Do need a home office and may also choose to rent out the bottom floor. I currently do both in my current primary residence.
Not worrying about zoning for the rental etc, would such an exchange work from a tax deferral standpoint?
Thank you so much for this excellent forum!
Are
andresen_are,
There are two basic requirements for a fully tax deferred exchange:The replacement investment property must cost at least as much as the sale price of the relinquished investment property, and,all of the proceeds from the sale of the relinquished property must be reinvested in the acquisition of the replacement property.
As blueford already said, since your investment property sale price will be $300K, then the replacement property must cost at least $300K to keep the exchange fully tax deferred AND your $180K net sale proceeds must be reinvested in the acquisition of the replacement property.
The last post is correct in that you must replace the exchange value based on your net sales proceeds. If you sell a rental for $300K you must have at least $300K in "value" of the new property allocated as rental or business property. It is not based on equity, but your net sales price (after deducting routine closing costs).
The transaction will work and is done all the time. It is your intent that is important, so be sure that you really do rent out the property or use if in your business and document it well.
[addsig]
For some reason I always thought it was the gain that dictated the replacement value - I certainly was wrong on that one!
Great - thank you so much for the information everyone!
Both depreciation and suspended losses will be adjustments to your cost basis on the relinquished property. Your adjusted basis in the relinquished property plus any additional money required to complete the acquisition of your replacement property becomes the new basis in your replacement property.
An exchange is not a taxable event, so no depreciation recapture will occur nor will suspended losses be realized in the tax year of the exchange.
Thank you for the reply. So if I later build a house on my unimproved property and convert it to my personal residence, I would lose the use of any loses being carried forward on the property (which were carried over from the initial investment property)?
And I would pay taxes on the recapture depreciation at that time?
No, suspended losses are not really "lost". When the exchange is completed, your suspended losses increase your cost basis in the replacement property. When the replacement property is sold, your higher cost basis just reduces your taxable profit.
The depreciation component will be taxed at 25%, the appreciation component will be taxed at a maximum of 15%.
In your case you have probably depreciated the property by $6818 assuming 27.5 years depreciation schedure for 2.5 years. So $6818 will be taxed at 25% = $1704 and $127K - $75K = $52K is taxed at 15% = $7800 for a total tax of $9504. This assumes that nothing else (i.e. rehab costs, capitalized closing cost) has altered the basis of the property.
That was a great answer, thank you very much!
Not enough details to really give you a good answer. But, investors are typically more expensive than conventional loans. You may want to post your question in the commerical forum for a better response.
Thanks. I will submit it there to. You sound like you know a thing or two about this, what details are you referring to? My goal is to sell an acre or so now for the cash. In return, the investor would have a vested interest when it sold (max 10 years). Am I dreamin?
Will the 5,000 be reflected in the settlement statement/HUD-1?
yes, it would show it going to a third party
Since this will appear on the HUD-1 as a seller concession, the only impact upon the seller is that his net profit is a little lower. He does not pay taxes on the $5K, and there is no need to file a 1099.
Newkidintown2 had it exactly right. Bank on it.