Tax Question/1031
I recently ( this summer) purchased a few land parcels with the intention to sell them and make money to invest in buying a fxer house and rehab for sale. My question is : if I sell my land, how do I report that to IRS? Will it count as a tax exempt if I use a 1031 broker and have him deposit money on my home equity line of credit loan which I used to pay for the fixer? In addition to this, can I use 1031 to pay for the rehab costs?
Thank you so much for your answers, I appreciate it in advance. 
Quote:
On 2004-10-19 14:17, podrugiput wrote:
Will it count as a tax exempt if I use a 1031 broker and have him deposit money on my home equity line of credit loan which I used to pay for the fixer? In addition to this, can I use 1031 to pay for the rehab costs?
Excellent question as I would also like to know the answer to that. Or basically can one pay off any accounts or debts "associated" with the rehab i.e. credit cards for which supplies were purchased, etc before the exchange without being taxed?[ Edited by fmmp on Date 10/19/2004 ]
What you are doing is considered an active trade or business by the IRS and is earned income taxed at ordinary income rates plus 15.3% additional if reported on sch C, which requires sch SE.
The key for a 1031 transaction is the intent. You stated your intent at the time was to resell the land. It is clear to me that you are not eligible to use 1031 in this instance.
If you got audited it would be your burden to prove that your intent was to hold the property. A good rule of thumb is holding a 1 year period, although development type activities which typically take more than a year, are still not eligible for 1031.
Myfrogger is right on the money. If your property in this transaction was HELD as investment/rental property and not for flipping you could structure it as a build-to-suit 1031 exchange and the 1031 exchange funds could be used to buy the vacant land/dirt and pay for improvements.
[addsig]