1031 Tax advice needed

[DOSCOASTS]

Did a 1031 exchange with intent to rent it out; a condo in Florida. PROBLEM 1: The complex started concrete work 3 days after I purchased in June 2020, and it could not be rented out. The concrete work just got wrapped up on the 30th of December 2020. There is no rent for that time frame as nobody would rent with all the jack hammering going on. I don't want to get dinged by the IRS for that time frame... PROBLEM 2: During those months the condo set vacant while the concrete work was being done, I got VA disability along with base access and use of VA clinics. This new condo sits 1/2 mile from a base that provides all these things. My current home is in a remote area and the VA benefits would go unused, and I sure need the ability to use those benefits (health problems). If I were to move into the 1031 property (the condo), what would my chances of getting dinged by the IRS be under these circumstances? My current home, which is in the extreme north of California would be rented out if my wife and I moved to the 1031 condo in Florida. Injuries sustained over 30 years ago have been causing me a lot more trouble of late, and really need a VA clinic/hospital close by. Thanks for any and all help.

 

[LdiJ]

Did a 1031 exchange with intent to rent it out; a condo in Florida. PROBLEM 1: The complex started concrete work 3 days after I purchased in June 2020, and it could not be rented out. The concrete work just got wrapped up on the 30th of December 2020. There is no rent for that time frame as nobody would rent with all the jack hammering going on. I don't want to get dinged by the IRS for that time frame... PROBLEM 2: During those months the condo set vacant while the concrete work was being done, I got VA disability along with base access and use of VA clinics. This new condo sits 1/2 mile from a base that provides all these things. My current home is in a remote area and the VA benefits would go unused, and I sure need the ability to use those benefits (health problems). If I were to move into the 1031 property (the condo), what would my chances of getting dinged by the IRS be under these circumstances? My current home, which is in the extreme north of California would be rented out if my wife and I moved to the 1031 condo in Florida. Injuries sustained over 30 years ago have been causing me a lot more trouble of late, and really need a VA clinic/hospital close by. Thanks for any and all help.

Your overall situation is complicated enough that advice from an internet forum would not be in your best interest. You need a consult with a tax professional and likely need to coordinate that with the VA.

 

[Taxing Matters]

Did a 1031 exchange with intent to rent it out; a condo in Florida.

The details of the § 1031 (like kind) exchange matter. But one clear rule for a like kind exchange is that you cannot use your personal residence as the property you either give up or obtain in the exchange. Thus, the law is that you must have truly intended that the replacement property was going to be a rental property at the time you obtained it in the exchange. If you really intended it to be your personal residence and simply made a show of trying to rent it to try to sneak in a personal residence in a § 1031 exchange that transaction would fail to qualify as a like kind exchange and you'd end up recognizing the gain on the property you gave up (and might get hit with a penalty, too). In the case law the fact that you move into a property shortly after you get it could be taken as evidence that you didn't have a true intention to hold the property as a rental property. You'd want to point to the efforts you made to try to rent it and the changes in your personal situation that occurred after you got the property to explain why you had the intent to hold it as a rental property at time you obtained it and that it was only because of subsequent events that you needed to move into it as your residence. No way for me to predict how that would come out if the IRS seeks to invalidate the § 1031 exchange as I don't have all the facts and the evidence you have to support your position. You might want to consult a tax lawyer as to how likely it is that your claim to the like kind exchange would hold up if you move into the place now, just 6 months after you obtained it.

 

[DOSCOASTS]

Taxing Matters -

Thanks for the reply. You are stating exactly what I believed a tax attorney would have. I'm just caught in a awkward situation as the health care via the VA is so bad in northern California (the local VA rep calls it the 'black hole of VA health care'), and the health care in Florida is just the opposite - it is extremely good. In so much pain that I really need to do something, but don't want to get beat up by the IRS. Bad timing of the exchange for me, as the property I gave up in the exchange was another condo in Florida close to the base and VA clinic also and the 'given up' condo had been owned long enough that it could have been lived in (it was obtained with a 1031 exchange also). Saw an opportunity to trade up for a better rental and took it. Should have kept the old condo I guess.

 

[adjusterjack]

Practical advice from a fellow vet who also relies on the VA for health care. Quality medical care should be more important to you than trying to beat the tax man. Move into your Florida condo, sell the CA house, take the tax hit and get on with your life.

 

[davew9128]

I'll just point out that the if you're trying to skate by on this with the personal use of a 1031 exchange, that CA FTB is far more likely to find out, as I know from "sources" that they literally look at every single 1031 they get on a return, if not outright audit them, due to the likelihood of an error on the calculation. Not to mention a 1031 to a property out of state. CA FTB is for less kind than IRS in most instances anyway.