hello, i am writing from rural grayson county, virginia (mouth of wilson 24363). i own 3 small tracts of land. i would like to sell about 2 1/2 acres off 2 of these (5 - 6 A total)to get cash to begin restoring an old log house on one of them. it will either become my primary residence or a rental property. can i take profits from the sale of the land and put them into restoration and avoid capital gains? even though this is small stuff every penny counts!

also, the 3rd lot (2 acres) i just purchased last spring to protect the view from the old house--can one take capital gains exchange retroactively?
if so, for how long?

thanks for your help1 i am a wee small citizen who knows naught about this stuff.

I'm afraid I have to be the bearer of bad news in regard to your proposed plans.

1. The one kind of real estate that is absolutely not eligible as a replacement property is one that will be used as a primary residence.

2. Reinvesting exchange proceeds into improving existing structures is not allowable either. In some cases, the exchange proceeds may be able to be used to construct an entirely brand new structure on property that was previously owned; but even that is a gray area of 1031 exchanges.

3. Reverse exchanges, where the replacement property is acquired before disposing of the old one, are possible. There are different ways to structure them, including the IRS's safe harbor of parking the new property with an unrelated third party. Whichever way is used, it must be set up ahead of time. If you have already taken title to the property, it is too late to try to go back and change that to be part of a 1031 exchange. IRS calls that an "afterthought" because you thought of doing the reverse exchange after you had already bought the new property.

I'm sorry to spoil your plans. Remember that I don't make the tax laws. I just do my best to interpret them for real people in the real world.

You can see many more details on how to properly set up a legal 1031 exchange at www.TFEC.com

Good luck.

Kerry Kerstetter

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/21/2004 03:50:00 PM Send this post: