1031 Exchange With A "SPEC" Home...

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My clients just built a new house, always with the intention of selling it right after it's built. This is their first time doing this.

Would selling it and purchasing another "like kind" (investment) property qualify for a 1031? Or is this considered a "SPEC" home, and therefore does not qualify?

They have never lived in it and have always had another primary residence.

Thanks
Chris

Comments(5)

  • InActive_Account11th March, 2004

    A 1031 must be income producing. A spec house will not qualify.

  • myfrogger11th March, 2004

    I am not an expert in 1031 exchanges and am not an accountant or lawyer. Definatly consult your professionals.

    It is my opinion that your clients should be able to use an exchange with this property if this is the first home that was built. If your clients get in the habit of building homes the IRS would likely classify your activity as an active trade or business. These propreties do not qualify.

    DaveT is the expert on this board so you might consider a PM to him with a link to this post kindly asking him to respond.

    GOOD LUCK

  • DaveT11th March, 2004

    I agree with MichaelChandler.

    The determining factor here is how the property is being used prior to the exchange. If the property is in service for a qualified investment use, then it may participate in a tax deferred exchange.

    A qualified investment use is either (1) production of income, such as rental property, or, (2) holding for future appreciation. In this instance, I don't see a qualified investment use.

    I agree with myfrogger when he says that continuing this activity will be construed as an active business. Profits from this business are taxed as ordinary income and bring self-employment taxes into play. However, in this first instance, if this is the only time your clients will engage in building speculation, then they should be able to take a short term capital gain tax treatment on the sale instead.

    I am not a tax professional, lawyer, nor CPA. The information in this forum is simply my opinion and is presented for educational purposes only. It is not to be construed as tax or legal advice. Your clients should consult a tax professional licensed to practice in their state for specific details.[ Edited by DaveT on Date 03/11/2004 ]

  • niravmd7th April, 2004

    i read the tax code on capital gains, and holding of property solely for the appreciation is an activity that justifies capital gains tax treatment.
    doesn't this make it eligible for 1031 exchanges or am i confusing 2 no-related issues?

  • DaveT7th April, 2004

    Quote:My clients just built a new house, always with the intention of selling it right after it's built.There is no investment use here. This property is NOT being held for the production of income, nor for future appreciation. Instead, this is a property flip which is a dealer disposition.

    A 1031 exchange is not available to your clients for this property. Bear in mind that our connotation of "investment property" is a lot broader than the IRS definition of "investment use property".

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