1031 Questions
Example: I have raw land I bought for 500,000. I have owned it for 8 months. I have been offered 2,000,000 for it. I did not plan to sell it so fast. I planned to hold it longer period of time.
1. If I sell it under 1031 rules using a 1031 intermediary can I buy apartments and then receive the rents as cash flow? I realize the cash flow is taxable.
2. Does all Real Estate meet the like kind rule? In other words; apts traded for land or a house traded for a vacant lot or a commercial office building traded for a residential house?
Thanks [ Edited by Ricker on Date 11/03/2004 ]
One more 1031 question:
3. What if you have real estate commissions owed on your sale? Can you use the proceeds frm the sale to pay them?
1. Yes
2. Almost Yes. According to the IRS,
"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."
3. Yes (effectively) The net proceeds from the sale of your relinquished property (ies) go to the 1031 intermediary account for acquisition of replacement properties. Therefore, the RE commissions and closing costs are paid from the proceeds of the sale before the residual is transferred to the intermediary.
Did you stay at a Holiday Inn express last night?
I stayed late at my office last night.
I am currently in the middle of a 1031 exchange if you need more info. Also, Bill Exeter, who is an active member of TCI is CEO of a company that does 1031s, is very well informed. His user name is wexeter.
Absolutely, on both parts. Any type of real estate is like kind to any other type of real estate, as long as both properties are held for investment, rental or use in a business. So, in your case, vacant land held for investment (capital appreciation) can be exchanged into multi-family property. The only potential risk that you have is the holding period of only 8 months. The IRS could challenge your "INTENT" to "HOLD" the property for investment as opposed to holding for sale. Your arguement ("position"
would be that you intended to hold for investment but the market was very hot and you received an offer that you could not say no to. The best way to position yourself after the fact is to acquire the multi-family property and hold it for a much longer period of time so that you can prove that you did in fact reinvest and did in fact HOLD the property for a period of time. The rental income is taxable as ordinary income, etc.
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Absolutely, on both parts. Any type of real estate is like kind to any other type of real estate, as long as both properties are held for investment, rental or use in a business. So, in your case, vacant land held for investment (capital appreciation) can be exchanged into multi-family property. The only potential risk that you have is the holding period of only 8 months. The IRS could challenge your "INTENT" to "HOLD" the property for investment as opposed to holding for sale. Your arguement ("position"
would be that you intended to hold for investment but the market was very hot and you received an offer that you could not say no to. The best way to position yourself after the fact is to acquire the multi-family property and hold it for a much longer period of time so that you can prove that you did in fact reinvest and did in fact HOLD the property for a period of time. The rental income is taxable as ordinary income, etc.
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Thanks. You know what is funny? Last week I had an apt with my CPA. He said "like kind" means raw land to raw land, multi family for multi family etc. I told him he thought he was wrong. He sent me the regs and they are hard to decipher but I did find a website that made it real clear. He was wrong. Thanks again guys.
I'm curious - what regs did he send you? (If you still have them.) I think I would look for a new accountant.
The applicable Treasury Regulations are Section 1.1031 and can be viewed here: http://www.diversifiedexchange.com/exchange_info.asp.
It does not surprise me that your CPA is not correct. The Code and Regulations are not always easy to understand or interpret and it takes lots of experience with Revenue Rulings, Revenue Procedures, Private Letter Rulings and Court Decisions to really learn and understand the 1031 exchange.
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