Can You Get Out Of Real Estate With A 1031 Exchange
If you think this bubble will burst - and you want to insulate your investment profits - where can you go and still use a 1031 exchange? I undrstand you can buy a business and operate it, is tht right? Can you do something like buy shares in a mutual fund, or buy a partnership interst in a business. How far from real estate can you get?
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If you think this bubble will burst - and you want to insulate your investment profits - where can you go and still use a 1031 exchange? I undrstand you can buy a business and operate it, is tht right? Can you do something like buy shares in a mutual fund, or buy a partnership interst in a business. How far from real estate can you get?
JayLevin,
Since the foundation of a valid 1031 exchange requires that the exchanged properties be "like-kind". This disqualifies mutual funds, and usually a partnership interest.
Now understand that the like-kind rules allow you to exchange real property for real property, but not real property for personal property. A business can be exchanged for another business, but I doubt you can exchange an apartment building for a bowling alley. I don't know for sure, I am just pessimistic on this point.
Good question to ask your professional tax advisor.
That said, I challenge your need to get out of a producing real estate investment just because you fear some "bubble" will burst somewhere at some time in the future.
If your investment real estate is generating income, your income shouldn't stop just because some nebulous bubble burst somewhere. If your real estate market is a bubble market, and if the bubble really does burst, how will a temporary decline in your property values halt your cash flow?
Perhaps if you explain how the bursting bubble will affect you financially, maybe we can give a more enlightened answer.
Talk with yoor 1031 exchange. Here's some information I found on one 1031 site:
http://www.ipx1031.com/reexchanges.html
Due to the broad definition of “like-kind” for real property exchanges, these types of exchanges are generally one of the most common. In general, any type of U.S. real property interest held by the client for productive use in a trade or business, or for investment purposes can be exchanged for another real property interest regardless of its grade or quality and as long as the property to be exchanged is considered real property under the state law in which the property is located. For most real property exchanges the taxable gain is due to a combination of the appreciation in value and the amount of depreciation taken over the period of time that it was owned by the client. The following are examples of the wide variety of real property interests that are deemed to be of “like-kind” and that can be exchanged: vacant land, agricultural land, office buildings, industrial parks, apartment buildings, single family rentals, 30 year ground leases, retail malls, undivided fractional interests, mineral rights, oil fields, air rights and development rights.
One suggestion I've heard (assuming you're holding property in your own name, or an LLC that can be liquidated tax-free--not an S or C Corp) is to find a place you want to live in a year or so down the road, then exchange your realty for it.
Here's where things get murky, and I doubt anyone can give you a foolproof answer. Your acquisition of the home needs to be for investment purposes. Acquiring for the purposes of living in the home might well destroy 1031 eligibility. So the home needs to be rented out. Some folks have suggested it needs to be rented out for a year and a day, others say just make sure the 1031 transaction and your conversion of the home to your own use don't occur in the same tax year. In any case, you either liquidate your LLC (taking the home with its existing basis), or just move in.
Once you've lived in it two years, you get to sell it ... and all (well, the first $250k for an individual, $500k for a couple) of its lurking capital gain becomes nonrecognition income. Meaning no tax. Zero. Zip. Nada.
If this happens a few times, it will wind up in tax court. The IRS will lose. But they will run to Congress. So if you're going to try this, don't wait too long, or there WILL be a recapture provision written into the Internal Revenue Code. Guaranteed.
What a great place - such valuable info just for the asking. Thank you all so much.
Regarding Dave's question - imagine I owned internet stocks in the late 1990's. When the bubble bursts the values go down and I'd like to get out for a time if there were an easy way. Remember 1990? 1,000,000 properties turmed into 800,000 properties. I'm not here to prove anything - and dont mind spending some time on the sidelines when I see values do what they are currently doing compared with median incomes. Think Tokyo -
Quote:Remember 1990? 1,000,000 properties turmed into 800,000 properties. I'm not here to prove anything - and dont mind spending some time on the sidelines when I see values do what they are currently doing compared with median incomes. If you had $1MM in investment residential rental property in 1990, and if you saw your property values decline to $800K, and if you held onto those properties throughout the market cycle, those properties still generated income that was largely unaffected by the decline in property values, AND those properties today are now worth $2MM.
I ask again, why worry about a bubble if you have income producing properties that you don't need to sell?
I understand, and in fact my props dropped 20 % but since have doubled - just as you said - BUT - that was before Bush; amd before the economy hit this low. Things are different now. The P/E of income propertiy is getting higher and higher (price/gross rent), ie rents are not tracking market value. The average cost of property is becoming less and less affordable. Matbe the move is to shift to commercial property since it is in decline - but if I could I'd just like to sit it out. I bet lots of people in 1933 wish they had just taken a break a few years earlier.
Robert Campbell has written a book you may enjoy called "Timing the Real Estate market".
His premise is that since real estate markets move in cycles, you can make money by buying at market lows and selling at or near market tops. The problem his book addresses is in knowing when to buy or to sell.
A question I have thought of is what if you own your property in an LLC or such and you then sell the LLC (not the property) and exchange it for another company?
Dave - I'll look - in general I feel humble about my ability to time markets - ie stay till the last minute. If I could I'd just get out too early and console myself if I made a mistake - BUT - I'll read it immediately - thanks
Frog - I dont understand enough to know how to do that, but exchanging my current property for stock for example in a corp that I own is not like for like exchange - Im pretty darned sure of that.
You're suggesting for the future that I should hold property via a corp or LLC and then the corp can resell - but that is taxable - NO? There isnt anything like 1031 for stock or else no one would be paying capitol gains on stock earnings - they'd just roll it over - right?