Q:

Let me say I saw your web site and blog for the first time just now and I found it very interesting and well done.

Can I ask you a question?   Is there a fee to answer questions?

We bought 3 lots side by side in a subdivision in ID all in one transaction for $60,000 total a year ago.  We have an offer from an individual who wishes to buy two of the lots this week for $80,000.  We are also buying another 10 acre lot for $80,000 in the same general area that we plan to use to build a Summer home.

I want to do a 1031 exchange,  trading the two lots for the one lot, so we don't have to pay tax on the gain.  The same buyer is buying the two lots so we can do one transaction with him.  Both closings for the two lot sale and the 10 acre  lot purchase will be within the next month.  

  One other twist that I am not sure about is this.  The buyer of the two lots is a builder who is building a pre-sold custom home on the first of the two lots.  He wants to pay 40,000 now and then the other 40,000 when he has closing on the finished property on the first lot.  Can I do the 80,000 sale within next 30 days with 40,000 down and the rest to be financed by us and then the remaining 40,000 to be paid down the road 6 months or whenever house on first lot is completed?

A:

What you are proposing may be possible; but there are some particular issues that you need to keep in mind.

First is the definition and descriptions of the properties to be involved.  Personal use property is not eligible for Section 1031 treatment.  Rental and investment properties are.  The property you are disposing of needs to be considered investment property to qualify for Section 1031.  Likewise, the new property needs to acquired for investment, business or rental usage to be considered like kind to the investment property you are disposing.  I would avoid using the term "Summer Home" and consider it as an investment or rental property.

Next is the issue of the cash from the carryback note you will be receiving from your buyer.  This must be turned into cash and reinvested into the new property within 180 days after you transfer title from your old property.  As with any 1031 exchange, you need to use the services of a neutral third party facilitator, as well as be sure not to touch or have constructive receipt of any of the proceeds.

If the note won't be paid off until after the 180 days, a common technique that is used is for you to sell that note and convert it into cash before your 180 deadline.  We have seen a number of 1031 exchanges where that strategy was used, often with a family member as the buyer of the note.

These are just a few ideas that came to me.  As always, you should go into more detail with your own personal tax advisor.

Good luck.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/22/2005 01:41:00 PM Send this post: