1031 exchange

[TrustUser]

What is the name of your state (only U.S. law)? california

i may be making quite a bit of profit on sale of land. it qualifies for long-term capital gains, as i have had it for 4-5 years.

but i am possibly thinking of a 1031 exchange, which i have never done before.

from what i can tell, the property i buy must be identified within 45 days, and received within 180 days.

both properties will be in the usa.

if i am gonna buy another piece of property, i think i would prefer a residence in a reasonably good area.

this land is actually 4 residential lots, which a developer would be building houses.

is this land and a residential property considered to be "like-kind" properties ?

 

[ShyCat]

is this land and a residential property considered to be "like-kind" properties ?

No .

 

[FlyingRon]

I disagree. If you bought the first piece as an investment (as opposed as buying it to farm or develop of your personal residence and the new property is still a real estate investment property and not a residential property you're developing to live in (or your relatives) its would qualify. Land is land as far as like kind is concern even if the eventual developed use is different.

The other key thing is you can't receive any funds out of this or constructive use of them in the process of the transfer.

 

[tranquility]

I disagree. If you bought the first piece as an investment (as opposed as buying it to farm or develop of your personal residence and the new property is still a real estate investment property and not a residential property you're developing to live in (or your relatives) its would qualify. Land is land as far as like kind is concern even if the eventual developed use is different.

The other key thing is you can't receive any funds out of this or constructive use of them in the process of the transfer.

Land may be land, but like kind requires said land to be held for productive use in a trade or business or for investment. I am uncertain as to what the OP means here when he talks of a residence in a reasonably good area. Is it to be HIS residence, or is it going to be A residence he rents out? The latter may be OK, the former is not. While there is a safe harbor for holding times if a person LATER decides to change a proper exchange into a residence, if the safe harbor is not met the IRS looks at all the surrounding facts and circumstances to determine the intent.

From Rev. Proc. 2008-16:

the taxpayer owns both properties for the qualifying use period (for the relinquished property, at least 24 months immediately before the exchange; for the replacement property, at least 24 months immediately after the exchange); and

within the qualifying use period, in each of the two 12-month periods immediately preceding and following the exchange, (i) the taxpayer rents the dwelling unit to another person(s) at a fair rental for 14 days or more, and (ii) the period of the taxpayer's personal use of the dwelling unit doesn't exceed the greater of 14 days or 10% of the number of days during the 12-month period that the dwelling unit is rented at a fair rental.

 

[TrustUser]

i should have been more clear.

i knew i could not buy a house for me to live in.

i was thinking of buying a residential house that i would rent out, as opposed to something considered to be commercial.

i cant take possession of the money at any time ? that would pose a problem for me. i was planning on allowing the buyer of my land to choose what title and escrow company to use, so i would not be too anxious to have the funds in some trust account at escrow ?

thanks for the replies. i figured i ought to see what sorts of problems i might have.

when i did some internet searches, i could not find anywhere that negated a land for a house exchange. i did find that they both basically had to be in the usa, which was not an issue for me.

but i figured you real estate guys have probably done tons of 1031 exchanges.

i usually make most of my money from lending my money in real estate loans. and all the headaches that i have gotten in the past, tend to be from inheriting properties in bad areas.

owning a reasonably nice house and having a property manager removes the work from my plate, for the most part.

it also allows me some growth in assets, as opposed to the no-growth totally taxable interest income that i receive from my loans.

 

[TrustUser]

yes, the land is 4 residential lots that i currently own, cuz i had to foreclose on the loan that i had made to the previous owner.

the house would also be a residential house that i would rent out.

i dont necessarily have to buy a residential house, if there is some other property that would qualify as a like-kind exchange.

but i think i would prefer it, over a commercial property.

there are advantages and disadvantages to most kinds of different properties.

 

[TrustUser]

i cant recall ever using the capital gains taxation on my tax form ?

but in doing some research, i found this

Long-term gains and qualified dividends taxed at

0% if taxable income falls in the 10% or 15% marginal tax brackets
15% if taxable income falls in the 25%, 28%, 33%, or 35% marginal tax brackets
20% if taxable income falls in the 39.6% marginal tax bracket

i make a decent amount of money each year, but nothing out of the ordinary. the profit i would make from the sale of the land might quadruple what my normal taxable income for the year is.

if i were to make 200,000 in profit, would my additional tax on this profit be 200,000 x 20%, or $40,000 ?

if i were ever to purchase income property in the future, i would have completely wasted the 40,000. so it seems to me that if i am gonna get some income property, i should do it when i sell this land.

 

[FlyingRon]

Frankly, to my understanding, as long as you have investment motive: i.e., to hold the property for development or a true rental, without any motive to use it for personal use, it will be considered like kind. Even if you were to trade a commercial rental property for a residential rental or a one that you were hoping to subdivide and sell for a rental, it's still "like kind" as far as the code is concerned.

Long term capital gains for 2014 (and for recent past years) is 15% if you're in anything beyond the 15% marginal bracket.

Note however, that in some cases you were required to depreciate that property, and that must be recaptured (even if you didn't in fact take it) at a 28% rate.

1031 exchanges are involved and require an intermediary to do right, so I would suggest you find someone who specializes in such, not only to prevent an inadvertent taxable event now, but to prepare the information on basis, etc... you'll need when you eventually dispose of the exchanged property.

 

[TrustUser]

thanks ron,

http://www.1031.org/about1031/faq.htm

this seems to be right in line with what you have stated.

it does indeed look like this is a like kind exchange.

however, i dont know if i want the complications of a qualified intermediary.

i may be better off, just paying the tax, and if i choose to buy later, i can at least wait for a time and a property that i may be able to get at a better deal, than being forced to buy within a short period of time ?

the idea is looking a little less attractive to me, at the moment.

 

[TrustUser]

http://www.exeter1031.com/selecting_safe_qualified_intermediary.aspx

It is extremely important to note that 1031 Exchange Qualified Intermediaries are generally not required to be licensed, regulated, audited or otherwise monitored by any regulatory body (the Exeter entity that holds your 1031 Exchange funds is licensed, regulated and audited). In addition, 1031 Exchange Qualified Intermediaries are generally not required to be bonded, insured or maintain any other form of minimum equity capitalization.

hi ron,

thanks again. not interested in some business holding that much money of mine. i will just pay the tax, and be thankful that i made some profit on this one.

i dont depreciate my properties. but in this case, it is land, so no depreciation is ever taken.

 

[tranquility]

When you say you foreclosed, did you just make a loan and foreclosed against it or did you sell a property and take paper back?

Also, with that amount of gain, you may have to worry about the Obamacare (Medicare) tax of 3.8% on unearned investment income too.

 

[TrustUser]

i just made a loan, and foreclosed against the loan, becoming the owner.

i know nothing yet about obamacare. but i guess i may eventually !!

 

[TrustUser]

hi tq,

i do have other properties though that i will want to sell eventually.

and i would at least consider taking paper back on it to facilitate the sale, if i got enough cash up front to protect my interest.

what were you getting at with this scenario ? that i could no longer do a 1031 exchange ?

if so, i wont let that worry me - i dont like this business of some other entity holding all my funds until the time of exchange. on top of that, i need to pay them some fee, which no doubt will be a percentage of my profit, instead of just a flat fee for work performed.

the 1031 process does not seem like anything i am apt to like about it.

at least if i just pay the tax, i am over and thru with it.

i was actually thinking of continuing the process until i died, when the properties would be inherited, and possibly miss the tax entirely ?

 

[TrustUser]

btw, how much is california gonna hit me for ? 15% by the feds, plus another 3.8.

 

[tranquility]

hi tq,

i do have other properties though that i will want to sell eventually.

and i would at least consider taking paper back on it to facilitate the sale, if i got enough cash up front to protect my interest.

what were you getting at with this scenario ? that i could no longer do a 1031 exchange ?

if so, i wont let that worry me - i dont like this business of some other entity holding all my funds until the time of exchange. on top of that, i need to pay them some fee, which no doubt will be a percentage of my profit, instead of just a flat fee for work performed.

the 1031 process does not seem like anything i am apt to like about it.

at least if i just pay the tax, i am over and thru with it.

i was actually thinking of continuing the process until i died, when the properties would be inherited, and possibly miss the tax entirely ?

California will tax at your marginal rate as ordinary income. No special capital gain rate.

The foreclosing on property that you sold and later foreclosed on changes the capital gain on the "sale" to ordinary income.