1031 Question For Newby
I am a newby but have made some great decisions. I Bought 13 acres of land last year for 165,000. I just found out that the land will be annexed in and I can subdived into 6000 square foot lots. Short platted will sell for 40000 a lot. So I might make a million on this real soon. I am scared about taxes. Should I 1031 into an apartment complex, can I even do that.? Can I purchase more than 1 property with a 1031? Does it have to be bare land like the sold property?
NewKidd is right.
You can defer your capital gains by structuring a 1031 exchange. You qualify because you acquired land for investment.
You can exchange into any other type of real estate that is also held for investment, including land into an apartment complex.
You can sell one property and acquire multiple properties. The 1031 exchange is a great way to help you diversify into multiple properties in different geographic locations, etc.
You do have to trade equal or up in value, reinvest all of your cash, and replace any debt.
If you sell your land now and exchange into a multi-family property you will be in great shape. If you begin to subdivide you may be in trouble in terms of your 1031 exchange. Your intent must be to hold for investment. You could make the argument that you acquired the land for investment and decided it was time to sell and that the best way to maximize the value would be to divide and then sell, but there would always be a slight risk that the IRS could determine that your intent was to develop.
I would be happy to go into more detail with you if you like. Just IM me.
[addsig]
Quote:
On 2007-02-28 10:32, wexeter wrote:
You do have to trade equal or up in value, reinvest all of your cash, and replace any debt. Bill,
I disagree, unless you are specifically referring to a direct exchange.
The delayed exchange, or forward exchange is generally understood to be the context for an exchange in this forum. There is no requirement to replace debt (equal or up) in a delayed exchange because there is no debt relief even if there is no debt at all on the replacement property.
NewKid,
I was not real clear in my answer.
As long as you are trading equal or up in value and reinvesting all of your cash, then you will qualify. This means that if you have traded equal or up in value and reinvested your cash then you also either replaced your debt or you have added additional cash into the transaction. But, if you have not replaced your debt either with new debt or cash, then it would translate into trading down in value and would trigger a taxable event.
Hope all is well.
[addsig]
I agree. It was only the replacement of debt that I took issue with.
Terry,
The answer to your question depends upon what you did with your former primary residence between the time you vacated it and the time you sold it.
If no more than three years have elapsed between the time you vacated the property and you sold it, then you are still eligible for the $250K capital gains exclusion provided you did not claim the exclusion within the past 24 months. If more than three years have passed, then the property is no longer eligible for the capital gains exclusion on the sale of a primary residence
If you are using the property as a rental at the time it is sold, then the property can participate in a 1031 exchange. If you are also eligible for the capital gains exclusion, then withdraw $250K from your exchange funds and shelter them with the capital gains exclusion. Note that the capital gains exclusion does not shelter depreciation recapture. If you have more than $250K in profits, then let the excess fund your 1031 exchange escrow account
If the property remained a second home until you sold it, then you can not use a 1031 exchange to shelter profits in excess of the capital gains exclusion limitation.