Possible To Claim Airfare For 2nd Home In AZ?
Hi there! If I bought a 2nd home in AZ and flew out there to remodel or repair it, am I able to write off airfare on my tax return? Has anybody found a cheap way to fly other than using a mileage credit card? Thanks!
You have a few options if you expand your time frame.
Section 121: If you live in the house for two or more years, the first 250K (500K if you are married) is tax-free. This actually present a unique opportunity to rehabbers who are willing to live in a mess for a while and then walk away with a nice chunk of change.
1031 exchange: If you rent the house for over two years, you can roll the profit into a new purchase (or purchases) and then pay the capital gains when the property is sold. A 1031 exchange can be done over and over again so you could keep doing this. The problem you would run into is that the law says you must have the intent to hold without giving a specific time limit..
If you sell this one house before living in it, the IRS would consider it a dealer disposition and you would be responsible for SE tax and short-term capital gains (which is currently pegged at your regular income tax rate).
Quote:1031 exchange: If you rent the house for over two years, you can roll the profit into a new purchase (or purchases) and then pay the capital gains when the property is sold. A 1031 exchange can be done over and over again so you could keep doing this. The problem you would run into is that the law says you must have the intent to hold without giving a specific time limit..joecrane,
Where in the tax code do you find a two year holding requirement before you can relinquish the property in a 1031 exchange? Other posts in this forum by Bill Exeter, state that there is no specific holding requirement before your property can participate in a 1031 exchange, only that the property must be investment or business use property. Bill suggests that one year of investment or business use is sufficient to demonstrate the requisite intent.
Although I had dealt with tax law a bit with some other businesses I have owned, the first time I really got into tax law was for REI. Before that time, I thought tax law involved memorizing minutia and knowing more details about the law than the IRS auditor. So, I went about looking for the details in order to help me make a bigger after-tax profit. Turns out, there is a lot of ambiguity. This can be extremely frustrating as you are learning.
You say "Give me a timeline". The IRS says "Was your intent to hold? There is no specific time." Ambiguity.
You say "When am I classified as a dealer?" The IRS say "Did you hold the property for resale only or did you intend to rent?” More ambiguity.
Unfortunately, no one can give you specific timeline to hold property or when the IRS will have a ceremony designating you as a dealer. It’s unclear. It really boils down to what you feel comfortable with. Holding property as a rental for a year and then selling would probably pass muster with the IRS (wexeter is comfortable with this). I pick two years (at least) because that is what I am comfortable with.
Find a good 1031 intermediary. If they tell you they are willing to do a 1031 after a few months as a rehab, they only want your money. If they have a conversation with you about strategy and working with the slop in the law, they probably have your interests in mind.
And, no, holding a property just for the appreciation is not considered holding for investment. You must show income from the property.
Extra Advice:
Be advised that depreciation recapture is going to be a real pain; and, you cannot just not take the depreciation. The law says that depreciation recapture occurs on what your allowable depreciation was not what you took. Also, add in closing costs and other such items before making the strategy to resell every year.
Also, you may be specifically interested in both the reverse exchange and the construction exchange. A reverse exchange will allow you to buy the replacement property before you buy the relinquished property; and, a construction exchange will allow you to buy the property, use the funds from the sale and repair the property within the 180 day window. Interview your 1031 intermediary before you try those as they are less common.
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And, no, holding a property just for the appreciation is not considered holding for investment. You must show income from the property.
I am just a beginner here...so please excuse any ignorance, but I have always had a big intellectual problem with this fact (heard from several sources, not just here). In general, everyone says that holding for appreciation alone is no good for a 1031--which unambiguously eliminates all types of flipping, including pre-construction deals (my interest). After you wait 4-12 months for your property to be built, and then close, often you can see a 30k-50k appreciation. But to get this money you have to sell, and pay the government its share, UNLESS you rent it for a year (or two?). Then you can 1031 your way to happiness.
But how does this jive with the IRS requirement that you hold the property "for investment purposes"? Surely there is nothing inconsistent in saying that you bought the property for "investment purposes," independent of whether you receive income along the way or for a certain arbitrary period or not. Its just that your investment has paid off (appreciation) and now you want to cash out.
To make things more confusing (for me), it is my understanding that you can 1031 raw land with no hurdles whatsoever. Often there is NO income from raw land, but you can (I am told) "like kind" 1031 out of raw land into income properties or out of income properties into raw land with no problems.
Is there an inconsistency here...am I misunderstanding something? CAN you buy raw land, wait for it to appreciate, and then 1031 it into some other "like kind" investment (even though it produces no income)?
This thread brings up some interesting points that may be in conflict-- mainly with the lease and the option.
The option suggests an intent to sell, but then we intend to sell most investments. Furthermore, the option may not be exercised (many are not). I would be a bit surprised if offering an option disqualifies a property for a 1031.
The lease is clear evidence that you have intended to be a landlord and would certainly qualify for 1031.
I do know that intent trumps holding period for 1031s. My qualified intermediary was comfortable with me exchanging a property that I had held a few months when the occupant did not show ability to pay rent even though no rent was collected.
I hope that Bill (Exeter) will give his take on this. I am guessing he will say that the number of lease options per year may be a factor.
I am in the same boat.....did you get a good answer from your attorney? I plan to purchase under my own name, then quit claim to the LLC (formed with a buddy), and rent if from (myself)....
The short answer is yes you can and should do that. Everyone does it.