1031 Possible?
I just closed on a property at 95k which i was told was undervalued and worth 130k. An agent who works for a top realtor in nyc wants to list the property for sale at 150k and suggested i go through a 1031 exchange.
some factors..
1) The mortgage is with "intention" to use as primary residence
2) however, i have not moved out of my real primary residence
3) i have not rented this property out, and therefore made no money from it. does it count as an investment?
I want to sell it if i can make the dollars work but i dont want to pay taxes..
please help. thanks.
I am going to say no, you do not meet the requirements to participate in a 1031 exchange.
You must look at how a property is being used to determine its eligibility to participate in an exchange. You recently acquired property with the intent of occupancy as your primary residence. Your loan application confirms this. Your primary residence is not eligible to participate in a 1031 exchange.
Furthermore, the 1031 exchange is only available for property used in your business or held for investment use. There is no business use here since you are dealing with a residential property.
The IRS defines investment use property as property held for the production of income or for future appreciation. You are doing neither. Therefore, I will say that your property fails the investment use qualification too.
If you decide to sell now, your sale will be a taxable event.
Just my opinion. Please consult a professional tax advisor for specific details.
DaveT,
Thanks for your response. The points you made are valid. Those were my concerns as well. Here's what the realtor quoted me. He could be a member of this board, who knows?!
let me know how this sounds to you, if you don't mind. thanks.
quote:
"I will call you on Friday. To answer your question a sale of your unit will
be more advantageous for you.
I attached a document to show you what a buyer will pay if they decide to
purchase your condo at 150-160K. (that is a down payment of 7500 to 8000.
You can loan the down payment to the buyer or agreed on a 6% seller
concession)
I could sale your unit to buyers with moderate income. With 5% Down payment,
the mortgage payment with taxes, maintenance and insurance will be $1040.
You can argue with my analysis but if you rent the unit at $1000/Month you
will lose more than selling it now for 150K. You return on your investment
will be greater if you sale it in the next 60 days."
Quote:You can argue with my analysis but if you rent the unit at $1000/Month you will lose more than selling it now for 150K. You return on your investment will be greater if you sale it in the next 60 days." If the property will sell for $150K now, how much more will it sell for one or two years from now. How much better will your total return be after a year or two of appreciation has had its effect?
By the way, doubling your money now is a 100% return on your investment. Doubling your money six months, or a year from now is still a 100% return on your investment. The annual percentage yield will be different but the cash profit is still the same.
If you rent now and sell later, and if $1000 monthly rent produces a positive cash flow, how is your total return on your investment less than just selling now? I don't get it.
If you sell now, you do not qualify for long term capital gains tax treatment. If you sell later, you will. If you occupy as your primary residence for two years, you likely will have no tax liability when you sell in two years. Which alternative puts the most after tax cash in your pocket?
On the other hand, if you use the property as a rental now, the lender could call your loan due since you applied as an owner-occupant.
Why not sell the place you are living in now? If you have owned and occupied your current primary residence for two (of the last five) years prior to the sale, up to $250K of your profits will be tax free. Occupy your new property as your primary residence for two years, then sell it tax free if you wish. Perhaps, you might want to move into your new house, and convert your current residence into a rental for a couple of years, then sell it for tax free profits.
I think the real estate agent is really trying to earn himself a commission now. It may not really be in your best interest to sell now.
It sounds like your realtor doesn't have your best interests at heart. It is my understanding, also, that you have to hold the property two years to do a 1031 Exchange. Ifliving in the property for two years is an option, that would be better, as you would avoid 100% of the taxes up to 250,000 profit when you sell. However, consult an attorney.
[addsig]
It's MUCH MUCH MUCH Better if you sell it right now!
Let me tell you why....
Because my name's Bob, and I'm your realtor and I want to get paid NOW, and if you sell in 2 years and enjoy the long-term capital gain, rental income, depreciation, appreciation, and other tax shelters, there's a very good chance you'll sell it without a realtor, thereby making more money then also, so in short, notwithstanding, here are all the reasons why it's in your best interest to sell today.......ummm.......did I mention I get paid?
Seriously though....If you want/need cash today, have a deal that you'll like to use it for a 1031 exchange, and don't want to have it as a rental, then sell.
If you don't feel like finding another property, want a smaller tax hit, and the advantages of a rental then hold it. Make up your mind. Your realtor is his friend first and your friend second.
One other thing that hasn't been mentioned is the whole seasoning issue. If you decide to sell it in less than a year, your buyers lender may not approve it because of the spread. After all, if you bought it at "FMV" today and are selling it 1 month later then you've obviously inflated the value and the purchase price (BTW, I hate this mentality, but most lenders think this way.) It may be difficult to get a buyer into the home without a years seasoning on the title.
[ Edited by hibby76 on Date 02/27/2004 ]
DaveT,
So, does the type of loan come to play in an exchange? or do i just need to show that a property was used as an investment by providing taxes, leases, payment receipts? having an owner-occupant loan doesn't disqualify me, necessarily, right? also, if the bank calls on me, i can surely refinance too, right?
i can't sell my primary residence because i've only lived in it for 10 months. i do plan to sell it after i've lived in it for 2 years.
hibby76,
I definitely would like to use it for an exchange but like DaveT said, I do not meet the requirements. I haven't even made any income on it, nor did i get an investor loan. and second, the replacement property won't be ready until at least the end of the year. now supposed i rent it out, would it be harder to sell with a tenant in it with a lease?
what is the tax hit for a short term cap gain?
thank you all so much.
Quote:i can't sell my primary residence because i've only lived in it for 10 months. i do plan to sell it after i've lived in it for 2 years.
So, you lied on your loan application for the new property. You committed loan fraud. If this is a federally insured loan, you could be facing some large fines and prison time. If a mortgage broker told you to lie on your loan application, I hope you take that mortgage broker down with you. Perhaps you can plea bargain for a lighter sentence.
There is still a way to salvage this situation and avoid criminal prosecution. MOVE into the new property.
Convert your present residence (Property A) into a rental. Move into the new property (Property B) and establish it as your primary residence. After two years of occupancy, you can sell Property B and keep your profits tax free. Then move back into your rental property (Property A) and re-establish it as your primary residence. After you have lived there another couple of years, sell and pocket the tax free profits after depreciation recapture is paid.
Now, you have achieved your goal of minimizing your capital gains taxes, you have stayed out of jail, and you have all your tax free profits in your pocket from your primary residence (Property B) sale. Invest the proceeds into a couple of rental properties (Property C and Property D).
When you sell Property A and have all those tax free profits in your pocket, move into Property C and establish it as your new primary residence. Use the profits from the sale of Property A to purchase Property E and Property F.
Every two years, keep recycling your primary residence and reinvest your profits in multiple properties. At some point in time, you may not want to move but will want to sell one of your rental properties. This is where a 1031 exchange will allow you to defer capital gains on the sale of your investment property.