Q:

Subject: Exchange Question

 

I'm not a big time investor.  I've only paid cash for one property and financed two others.  In order to qualify for one of my townhomes I had to finance it with the idea that it was my second home even though I immediately rented a "room" to a tenant and still maintain access to it.  I want to sell this second home that I have owned for almost a year and put the proceeds into a new construction home that I intend to occupy within 6 months of owning it.  The house I live in now will then become my new investment property that I will rent out.  I have owned my primary residence for 4 years and lived in it the whole time.  I still have the free & clear in Florida which is also rented and this townhome I want to sell is in Arizona.  My new house and current house is in Nevada.  Do I have a chance of a 1031 from the AZ townhome to the NV new home since I will not make that much off the sale only having it for less than a year?  How much in taxes do I stand to pay if I have to? 

A:

The very first thing you need to do is get with your personal professional tax advisor and have him/her calculate the cost basis of your AZ second home, which will need to be adjusted downward for depreciation that you claimed or could have claimed if you didn't do so.  You should then provide him/her with the expected sales price and selling costs (commissions, etc.) so that the potential gain or loss can be more accurately estimated.

Only then can you get any idea of how much in Federal and State income taxes you will be looking at.  The tax rates you will be subject to will depend on your other income and deductions for the year.  Too many people get all hot and bothered about doing a 1031 exchange before even seeing if there will be any taxable gain to worry about.  You may discover that your potential tax will be only a few thousand dollars, which will make the cost and hassle of a 1031 exchange economically infeasible.

If, on the other hand, you are looking at several thousands of dollars in taxes on the sale, you will have reason to be concerned.  However, as you described your reinvestment plans, you would not qualify for a 1031 exchange because your new property would not be like kind to your old one.  Investment or rental property must be replaced with investment or rental property.  A residence that you are so open about intending to occupy is not either of those kinds of real estate.

Good luck.

Kerry Kerstetter 

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/09/2006 12:18:00 PM Send this post: