1031 W/ 121 W/ Family: Help!
PLEASE HELPPPPPP !!!!
My father is selling his motel he has had for 20 years that is fully depreciated and has a slight capital gain. I am trying to help him avoid capital gains through the use of a 1031 along with a 121. I know the Jobs Creation Act partially closed this loophole but its still open.
My question is, can I sell my father my house in a 1031. He turns around and rents it to me for 1 year and then moves in & claims it as his primary residence for 4 years and pass the 1031/121 test if he sells it after the 4 years?
Are there other creative methods that he could use to avoid capital gains and get the money back in his pocket in a relatively short time. The real problem is my father does not have much of a retirement savings and so he really needs to pocket as much cash as possible and minimize risking his "life savings".
He has to sell his property in a couple of weeks due to a sell contract he is in.
:-?
I don't think that you can purchase a relative's property in a 1031 transaction but I could be totally wrong.
The jobs creation act added a holding timeframe before you can use a 121 exclusion. This period of time is 5 years. This doesn't mean that this has to be lived in for 5 years (2 out of the last 5 still apply) there is just a required 5 years that your father needs to own the property.
IF, there is no problem with the relative thing then what you are proposing will work. I would advise calling your local Starker Exchange office
http://www.starker.com/contact.html
GOOD LUCK
I'm sure Bill Exiter will weigh in at some point on this one and he's much more of an expert at these things than I am. However, I suspect that if you ever got audited on this deal the IRS would rule that it was not an arms-length transaction and was engaged in solely to avoid the tax.
However there are other ways for your dad to sell the motel and defer the tax. For example he could do some sort of installment sale, carry back the note and pay taxes (at ordinary income rates but on much smaller amounts of money) as the money comes in. Since Dad has apparently already entered into a cash contract to sell the motel my advice would be to buy something less managment intensive in the 1031 and then sell that property on lease-option or contract for deed.
Related parties can do exchanges but if properties aren't held for 2 years after the exchange, all gain is recognized. So, you would also need to hold the motel for 2 years. Does your house have FMV equal or greater than the motel?
So, what are you going to do with the motel? If you going to hold it for investment that's great. But when you sell it, you're still going to pay tax on any gain you would have recognized on the sale of your home and you won't be able to use the 121 exclusion.
Newkid's a smart one! It is true that the property can't be fully depreciated over such a short time.
But to answer the question on active business income. It is true that if the motel business would be sold, the non-real estate part of the transaction would not qualify for a 1031. Only the real estate is eligible for 1031
First, it could easily be fully depreciated. Between '81-'86 lives for real estate were 15, 18, & 19 years.
Almost all property used in a trade or business is eligible for an exchange including personal property such as furniture & fixtures. So, as long as the furniture & fixtures are exchanged for similar property, the exchange is good.
I'm pretty sure that trade/business can be traded for investment property. The only thing that has to match up is the type of prop (real estate, furniture, autos, etc).
Thanks for the replies. Been having login in troubles so could n't reply back for the last two days.
When I said fully depreciated, I exagerated but for all practicle purposes I count it as highly depreciated. There is some left on it but not enough to help out against not paying high amounts of taxes. Original price of 230k, depreciated amount of 259k and still about another 50k left to depreciate. As you can see, all the capital investments over the last 20 years make the current depreciation higher than original purchase price.
Looks like more has developed in the last 48 hours. Closing date has been set on the old motel and we've found a good motel to exchange into. Its 3 times the sale price of the current motel so he should be able to leverage. Because the new motel is so much higher in price, does that mean I should not have any trouble with deffering both the real estate and "personal" property due for the like for like exchange requirements ?
I still wouldn't mind more comments on the biz to rental house exchange for learning purposes if any wants to chime in.
blueford,
Didn't those accelerated depreciation timelines only apply to residential rental property, while commercial property was held at 40 years?
I don't know the answer, just asking for my own edification.
WOW, lots of good questions here. Let me clarify a few issues.
Blueford is initially correct. There is a two year holding period when a related party transaction occurs. However, there has been a subsequent ruling by the IRS that essentially states when the "related party" ends up with the cash the 1031 exchange would essentially be disallowed, unless the recipient of the cash also has or does a non-taxable event such as doing their own 1031 exchange or a 121 exclusion. So, in your case you would sell your primary residence to your father and you would take a 121 exclusion.
There is a lot of misinformation about Like Kind property, so let me try to help with this. There are two tests: (1) the qualified use test; and (2) the like kind test. The qualified use test refers to the use of the property. The property will be qualified property if it is HELD as rental, investment or used in a business. The like kind test is easy. It must be real estate, and any kind of real estate is like kind to any other kind of real estate as long as the property meats the qualified use test. So, in your example, your father would sell the motel, which is classified as both rental property and property used in a business and therefore meets the qualified use test and would acquire your primary residence from you and then rent it back to you, which would be considered to be rental property. He would be exchanging rental/business for rental property, which DOES qualify. You do not have to sell rental and buy rental. You could sell rental and buy business, etc.
It is not entirely clear as to whether your father owns the motel, including the business interests, or just the real estate. If he also owns the business interest, then he can also structure a personal property exchange, but the definition of like kind in the personal property realm is much more restrictive. If this is the case, let me know and I can expand on this, otherwise my comments above are only related to real estate.
That was enough rambling for now. Let me know if that triggers any more questions.
[addsig]