We had a client who was selling raw farmland and wanted to buy a condominium. However, the condominium association rules only allowed 4 months of rental per year. This is not allowed in a 1031 exchange. There’s a case called Moore v. Commissioner in which the IRS challenged a lake cabin to lake cabin 1031 exchange where there was no rental or investment intent involved. The IRS said in that case that personal use is antithetical to holding for investment in one’s trade or business.
Delay Your Gratification
In order to pursue a successful 1031 exchange, you often have to delay your gratification. You must reinvest your equity into the replacement property and continue your investment. If you have mortgages on your relinquished property you may have to get back on the “debt treadmill” in order to satisfy all the benchmarks of a valid 1031.
Generally, a 1031 exchange requires you to go up in value. You need to reinvest all your equity from the relinquished property. You also have to offset your debt relief by either taking out new debt or by adding more cash out of pocket. If you win the lottery on the way to your replacement property closing you can just write a check to cover the debt relief.
Begin the Like-Kind Exchange Process
Begin the like-kind exchange process today and get on the path to capital gains tax-deferral. Section 1031 of the Internal Revenue Code is a fantastic tool that allows any US taxpayer to defer capital gains taxes and build wealth over time by reinvesting their net proceeds from the sale of a relinquished property into a new replacement property. If that sounds of interest to you, reach out to a qualified intermediary at CPEC1031, LLC to talk about the details of your next 1031 exchange and get on the road to capital gains tax-deferral!
Start Your 1031 Exchange: If you have questions about 1031 exchanges, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
© 2024 Copyright Jeffrey R. Peterson All Rights Reserved