• FreeAdvice has a new Terms of Service and Privacy Policy, effective May 25, 2018.
    By continuing to use this site, you are consenting to our Terms of Service and use of cookies.

Capital Gain

Accident - Bankruptcy - Criminal Law / DUI - Business - Consumer - Employment - Family - Immigration - Real Estate - Tax - Traffic - Wills   Please click a topic or scroll down for more.

catfishhoward

Junior Member
What is the name of your state (only U.S. law)? Georgia, USA

I plan on selling a rental property in Atlanta, GA and buy a homestead in Florida (land or land with home). My tax man said I would not have to pay capital gain on the sale of the rental property if I put that money towards the price of my new personal home property in Florida as long as it's in the time frame that is allowed. Is this correct?
 


FlyingRon

Senior Member
He was 100% wrong.

There is no way to do what he proposes. You could exchange it for another business (for example, rental) property, but not a personal residence. If you want to do the tax-free exchange for another like kind property, there are more restrictions than "just putting money towards another property."
 

catfishhoward

Junior Member
He was 100% wrong.

There is no way to do what he proposes. You could exchange it for another business (for example, rental) property, but not a personal residence. If you want to do the tax-free exchange for another like kind property, there are more restrictions than "just putting money towards another property."
I was thinking it needed to be an investment property, but he insisted it didn't, but that's why I'm looking into it more. Thanks.
 

LdiJ

Senior Member
I was thinking it needed to be an investment property, but he insisted it didn't, but that's why I'm looking into it more. Thanks.
If its any help, I agree 100% with FlyingRon and I am at tax professional. I am also pretty sure that the tax attorney who posts here would agree with Ron as well.

Your guy is just flat out wrong.
 

HRZ

Senior Member
Your guy is wrong ...but then again if you make a bonafide exchange for an investment property and then LATER convert it to personal use...that might work..but the IRS is ahead of you and there are some tighter rules to inhibit the obvious abuse potential,
 

LdiJ

Senior Member
Your guy is wrong ...but then again if you make a bonafide exchange for an investment property and then LATER convert it to personal use...that might work..but the IRS is ahead of you and there are some tighter rules to inhibit the obvious abuse potential,
That is literally horrible advice...even beyond horrible advice. Why do you do that?
 

HRZ

Senior Member
Well if you play by the rules it can work....and rev rule 2008-16 sets a 2 year brite line standard...do it in two months the IRS may eat a you for breakfast and toss in abuse penalities...see Goolsby v Comm TC Memo 2010-64 I don't know if new rules tightened up anything
 

Taxing Matters

Overtaxed Member
If its any help, I agree 100% with FlyingRon and I am at tax professional. I am also pretty sure that the tax attorney who posts here would agree with Ron as well.

Your guy is just flat out wrong.
You are right, I do agree with you and FlyingRon.

And yikes, catfishhoward that “tax man” who gave you that advice needs to find a new line of work in which he actually knows what he is doing. :eek:

The tax law on this is quite clear. An exchange of “like kind” property under Internal Revenue Code section 1031 can result in deferral of the gain and with respect to real estate most any exchange of one investment/commercial property for another investment/commercial property is considered to be of like kind so long as they are both in the U.S. But both properties involved (the one you give up and the one you get in exchange) must be investment property or property used in your trade or business. Assets, including your personal residence, that are primarily for personal use cannot qualify for a like kind exchange. IRS Publication 544 makes that very clear: “For exchanges completed after December 31, 2017, the nonrecognition rules for like-kind exchanges apply only to exchanges of real property held for investment or for productive use in your trade or business and not held primarily for sale.” Thus, your tax man certainly should have known the rule on this (or looked it up if he didn’t) before giving you that answer.
 

Taxing Matters

Overtaxed Member
Well if you play by the rules it can work....and rev rule 2008-16 sets a 2 year brite line standard...do it in two months the IRS may eat a you for breakfast and toss in abuse penalities...see Goolsby v Comm TC Memo 2010-64 I don't know if new rules tightened up anything
You are misreading the rules a bit. The taxpayer must have a real intent to hold the property as investment property at the time the exchange is completed. If the taxpayer has a plan to convert the acquired property to personal use at the time he or she does the exchange then it does not qualify. The very case you cited tells you that:

A taxpayer's intent to hold a property for productive use in a trade or business or for investment is a question of fact that must be determined at the time of the exchange. Bolker v. Commissioner, 81 T.C. 782, 804, 1983 WL 14892 (1983), affd. 760 F.2d 1039 (9th Cir.1985); Click v. Commissioner, 78 T.C. 225, 231, 1982 WL 11189 (1982). Taxpayers bear the burden of proving that they had the requisite investment intent. Click v. Commissioner, supra at 231; Regals Realty Co. v. Commissioner, 43 B.T.A. 194, 208 (1940), affd. 127 F.2d 931 (2d Cir.1942). We have held that investment intent must be the taxpayer's primary motivation for holding the exchanged property in order for the property to qualify as held for investment purposes of section 1031. Moore v. Commissioner, T.C. Memo.2007–134. The use of property solely as a personal residence is antithetical to its being held for investment. Starker v. United States, 602 F.2d 1341, 1350–1351 (9th Cir.1979).
Goolsby v. Commissioner, 99 T.C.M. (CCH) 1249 (T.C. 2010).

Your citation of Rev. Rul. 2008-16 is incorrect. That ruling has nothing to do with like kind exchanges at all. It instead deals with an issue related to charitable contributions made by S-corporations. I assume you mean to cite to Rev. Proc. 2008-16 instead. That procedure does set a safe harbor for testing whether a replacement rental property acquired in an exchange will qualify for a like kind exchange. The safe harbor deals with the sitaution in which the property is both rented out and also gets some personal use. The issue there is how much personal use is too much to disqualify it. The procedure sets out a certain period of personal use that won’t blow up the exchange. But that procedure does not override the rule that the taxpayer must intend at the time of the exchange to use it as a rental property and not a personal residence. Indeed, the ruling tells you as much by specifying that the taxpayer has to have the necessary intent to use it as a rental property at the time of the exchange as one of the requirements for qualfiying for the safe harbor. Some people in reading the procedure, including some like kind exchange promoters, overlook that part in their zeal to try to aggressively tax plan, but in doing so they are setting up their clients for potential problems with the IRS. They perhaps haven't also read the case law and other authority that helps reinforce the importance of the necessary intent.
 

catfishhoward

Junior Member
Thanks for all the replies, this information will allow me a direction to research before going to a lawyer. Just a couple additional questions.

1. I though about buying 10 acres with a home already on it to rent from the sale of my rentals which should be a "like type", is there any problem building a personal home on the 10 acres as well?

2. I also thought about buy or creating forestry land which I would clean up (thin out trees) the existing land and pick trees to keep and plant new trees for future timber (25 years). Would this qualify as an "like type" property? If so, could I also build a home on it and deduct the equipment used to work the forestry land?

If no, Would it make any difference if I were to make furniture and stuff from the trees currently on the property for sale, more of a side job maybe $6000 a year?
 

HRZ

Senior Member
I think you are asking for problems to mix personal use with investment use .

The folks I know who are planning ahead as to possible options ..are using well seasoned tax counsel and careful steps to have several YEARS of bona fide rental activity starting at time of exchange ( And other steps if one of the issues is to sidestep nasty inheritance taxes in current state , but that's not your post issue )

And to intentionally buy forest land to convert to personal residence land later is an invitation for problems .

ANd some of the "homestead" tax issues in FL suggest that may be a prudent area to consider instead of 1031 " games "
 

LdiJ

Senior Member
Thanks for all the replies, this information will allow me a direction to research before going to a lawyer. Just a couple additional questions.

1. I though about buying 10 acres with a home already on it to rent from the sale of my rentals which should be a "like type", is there any problem building a personal home on the 10 acres as well?

2. I also thought about buy or creating forestry land which I would clean up (thin out trees) the existing land and pick trees to keep and plant new trees for future timber (25 years). Would this qualify as an "like type" property? If so, could I also build a home on it and deduct the equipment used to work the forestry land?

If no, Would it make any difference if I were to make furniture and stuff from the trees currently on the property for sale, more of a side job maybe $6000 a year?
Get a consult with a tax attorney. You cannot do what you want to do. You are simply going to have to accept that. Perhaps you will accept it better from someone you pay to advise you.
 

FlyingRon

Senior Member
As TM alluded, like kind means that you're buying a investment/business property. It doesn't mean it has to be exactly the same...that is you can sell an office building and buy a trailer park if you want.

However, no way you can spin it will allow you to do a tax-deferred exchange on property that you intend to use for personal use. If you want to buy a property and use part of it for rental/business and part for personal use, you're going to have to partition it off so that none of the money from the sale of the previous is used for the personal parts. Further, you can't take any cash or personal use asset out of the sales proceedes (even if you pay tax on it). The entire amount must be rolled forward into the new property. Further, as I said earlier, you can't receive that money even temporarily, it has to remain outside your constructive possession. There are firms out there that specialize in handling such exchanges to avoid creating an immediate tax liability.

Also undrestand that unlike the personal residence capital gain exclusion which eliminates the tax on $250,000 of covered gain, the exchage we're talking about just rolls the tax liability forward into the new property. Eventually, you will have to pay it when you sell and don't do a further rollover.

Further, I hope you've been handling your rental tax issues properly as you've gone along, especially things like the depreciation deduction. That can really bite you at sales time as well. I'd recommend competent tax assistance.
 

Ohiogal

Queen Bee
Read the following sites for some easy relevant information, OP:

https://www.sapling.com/7754646/1030-exchange-real-estate

http://acquisitionbroker.com/1030-exchange-vs-other-options-2/

https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031
 

Find the Right Lawyer for Your Legal Issue!

Fast, Free, and Confidential
data-ad-format="auto">
Top