1031 tax insight help!

[cliffaz1620]

I posted this on another section of this site, but I am looking for a little more in-depth insight on doing this trans action than just a statement referring me to his CPA. If anyone has some advice it would be appreciated!
Thanks

What is the name of your state? Arizona

Hello, Thanks in advance for any help. We are trying to purchase our house from our landlord, he is willing to work a deal, but there is one small problem.

He purchased the home one year ago in a 1031 exchange, and if he were to sell now he would have to pay the taxes. We are renting the home now and he only wants retirement income, not a cash windfall. This is an investment property not his personal residence. We are both ok working something out as long as there are no tax ramifications for him.

I am not sure of the time lines involved with a 1031, he thinks he needs to hold the house for 5 years but I am thinking it is only 2 years... If there is a transfer of deed, can he roll the whole thing into another 1031? I was under the impression that if you continue to roll into another property, there would be no taxes.

If it is 2 years we thought we could do a lease w/option for two years, and then transfer the deed. That would be 3 years from his original purchase date, and he would buy something else on another 1031.

If it is 5 years I am at a loss of ideas, as I do not want to wait that long on a lease.

I am wondering if he does owner financing, with nothing down, and there is no real cash gain except a paper gain over time as a mortgage holder????

We are willing to be creative as long as it is safe for both of us. I am hoping to do the lease for 2 years or owner financing.

Thanks for the help,

 

[abezon]

He doesn't have to hold it for any time. The 2/5 year thing is for someone who does a 1031 exchange, then moves into the house himself, then want to exclude the gains from sale.

If he does an owner finance, he'll file form 6252 Installment sales. Your year's payments are split into principal, interest, capital gain, and recaptured depreciation. (On his return, not yours.) Definitely hire an attorney to represent you for this -- the legal fees are still less than you'd pay in closing costs. You don't want any pre-payment penalties so you can refi at a low rate; he'll want them so you can't saddle him with a huge tax bill by refinancing in December.

If he does another 1031, he'll just have a different rental house.

 

[slemerson]

1031 exchange Washington State

Here's another 1031 scenario for you . My wife and I did a 1031 exchange in Dec of 2004.
The prior owner is doing a rentback until May 1, 2005. My former CPA an IRS enrolled agent told me that she would like to see 15 mo's before we could convert it to our primary residence. Today the enrolled agent that our account was sold to advised me that she believes it's a two year wait before we can convert.
If there is new tax law in effect, when was it enacted and are we grandfathered in because we closed in Dec 2004?
Thanks for any help you can give or a direction to go in!
Steve

 

[abezon]

The new law took effect 10/22/2004. The IRS can challenge the 1031 exchange if you change to personal use within 2 years of the exchange. (No guarenteewho would win.) If you wait 2 years, the IRS can't challenge it. Either way, you need to wait at least 5 years before selling if you want to exclude the gains.

However, if you know you're going to live there & exclude the gains when you sell, you can elect not to claim depreciation on the new house & invoke the sec. 1250(b)(3) exception to the requirement that you recapture all depreciation "allowed or allowable".

 

[slemers]

1031 Wa state

Abezon,

Thanks very much, I found the new text for the 1031 rules on the web. My understanding is that the two years is Calendar years and not tax years.
We did this exchange in 12/04, so we will consider not deprec it for 04/ 05/ and 06.
We may bite the bullet and just pay the tax. Painful, but always an option. It would be in the 60K range....
Steve