If I own a lot and 1031 the proceeds to another lot, then improve the lot by building a vacation home, is that within the rules? The 1031 would be for the unimproved land only, right?
If the relinquished property is land you do not need to replace it with land. Here is a quote from an internet site.
"Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.
Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties."
There may be an issue regarding a vacation home since it may not be for investment or business purpose. If you build on the lot and rent it out, you should be OK. Bill Exeter will know immediately and perhaps he will respond to your post.
You can certainly exchange vacant land for vacant land as long as they are both held for rental, investment or use in your business. You mention that you will build a vacation house. If you mean a vacation rental, then it would absolutely qualify and not be a problem. If you mean a vacation house for personal use, then it would not qualify. It is all dependant on your INTENT. If you intent to acquire the vacant land as investment property and then a number of years down the road decide to convert it to a personal vacation home that would qualify, as long as you truly did have the INTENT to HOLD it as investment property. If your intent is to hold it strictly for a personal vacation home, the transaction would be disallowed under audit.
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With a 1031 exchange the mortgage on the relinquished property does not play a role other than for the amount available for you to invest in replacement properties. The total value of the replacement properties must be equal to or exceed the selling price of the relinquished properties.
The two most common rules on replacement properties is the 3 property rule and the 200% rule.
You can exchange into 3 or fewer properties of any value as long as the total replacement prices equals or exceeds the price of the relinquished property.
You can exchange into any number of properties, but the total replacement prices cannot exceed 200% of the price of the relinquished property and must equal or exceed the price of the relinquished property.
thank you for the explanation. it will help my situation a lot. i hope you are correct about the mortgage scenario.. i thought I read otherwise. i will contact a tax advisor but your explanation does help a lot.
thanks.
Quote:
On 2005-04-04 15:01, edmeyer wrote:
With a 1031 exchange the mortgage on the relinquished property does not play a role other than for the amount available for you to invest in replacement properties. The total value of the replacement properties must be equal to or exceed the selling price of the relinquished properties.
The two most common rules on replacement properties is the 3 property rule and the 200% rule.
You can exchange into 3 or fewer properties of any value as long as the total replacement prices equals or exceeds the price of the relinquished property.
You can exchange into any number of properties, but the total replacement prices cannot exceed 200% of the price of the relinquished property and must equal or exceed the price of the relinquished property.
The only two guidelines that you must comply with have already been mentioned. You must trade equal or up in value (i.e. sell for $230 and buy for $230 or more) and you must reinvest all of your net equity. You will here and read many people saying that you must replace the mortgage value because most people do not have the liquidity to do otherwise, but there is actually an example in the Treasury Regulations where you can replace the debt with all cash (or in your case, purchase with all cash). There is also a PLR (Private Letter Ruling) where the taxpayer refinanced the replacement property virtually immediately after the 1031 exchange was completed. So, you are fine with your proposed transaction.
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If the relinquished property is land you do not need to replace it with land. Here is a quote from an internet site.
"Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.
Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties."
There may be an issue regarding a vacation home since it may not be for investment or business purpose. If you build on the lot and rent it out, you should be OK. Bill Exeter will know immediately and perhaps he will respond to your post.
You can certainly exchange vacant land for vacant land as long as they are both held for rental, investment or use in your business. You mention that you will build a vacation house. If you mean a vacation rental, then it would absolutely qualify and not be a problem. If you mean a vacation house for personal use, then it would not qualify. It is all dependant on your INTENT. If you intent to acquire the vacant land as investment property and then a number of years down the road decide to convert it to a personal vacation home that would qualify, as long as you truly did have the INTENT to HOLD it as investment property. If your intent is to hold it strictly for a personal vacation home, the transaction would be disallowed under audit.
[addsig]
With a 1031 exchange the mortgage on the relinquished property does not play a role other than for the amount available for you to invest in replacement properties. The total value of the replacement properties must be equal to or exceed the selling price of the relinquished properties.
The two most common rules on replacement properties is the 3 property rule and the 200% rule.
You can exchange into 3 or fewer properties of any value as long as the total replacement prices equals or exceeds the price of the relinquished property.
You can exchange into any number of properties, but the total replacement prices cannot exceed 200% of the price of the relinquished property and must equal or exceed the price of the relinquished property.
thank you for the explanation. it will help my situation a lot. i hope you are correct about the mortgage scenario.. i thought I read otherwise. i will contact a tax advisor but your explanation does help a lot.
thanks.
Quote:
On 2005-04-04 15:01, edmeyer wrote:
With a 1031 exchange the mortgage on the relinquished property does not play a role other than for the amount available for you to invest in replacement properties. The total value of the replacement properties must be equal to or exceed the selling price of the relinquished properties.
The two most common rules on replacement properties is the 3 property rule and the 200% rule.
You can exchange into 3 or fewer properties of any value as long as the total replacement prices equals or exceeds the price of the relinquished property.
You can exchange into any number of properties, but the total replacement prices cannot exceed 200% of the price of the relinquished property and must equal or exceed the price of the relinquished property.
The only two guidelines that you must comply with have already been mentioned. You must trade equal or up in value (i.e. sell for $230 and buy for $230 or more) and you must reinvest all of your net equity. You will here and read many people saying that you must replace the mortgage value because most people do not have the liquidity to do otherwise, but there is actually an example in the Treasury Regulations where you can replace the debt with all cash (or in your case, purchase with all cash). There is also a PLR (Private Letter Ruling) where the taxpayer refinanced the replacement property virtually immediately after the 1031 exchange was completed. So, you are fine with your proposed transaction.
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NewKidinTown2, wexeter,
experts! thanks so much for the clarification.
You are looking good!
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