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1031 Exchange Question
Posted on 12/17/20 at 4:23 pm
Posted on 12/17/20 at 4:23 pm
I will likely be selling an investment property(single family home in Dallas) and I have my eye on a house that includes some acreage in Arkansas. I would like to do a 1031 exchange and acquire the Arkansas property. I plan to list it on AirBnb/VRBO and also see if I could lease any of the land out.
I asked my CPA about this to start getting feelers and she stated that she would not feel comfortable performing the tax return if I would use this new property for any personal use.
Does anyone have similar experience with this type of situation? What if it was listed permanently on an airbnb site and I use it occasionally as well? How would anyone be the wiser? Thanks
I asked my CPA about this to start getting feelers and she stated that she would not feel comfortable performing the tax return if I would use this new property for any personal use.
Does anyone have similar experience with this type of situation? What if it was listed permanently on an airbnb site and I use it occasionally as well? How would anyone be the wiser? Thanks
4
Posted on 12/17/20 at 4:32 pm to HBomb
quote:1031 has to be “in like kind”. Do you currently use your rental on occasions? I too would be suspicious and uneasy if I were your CPA.
What if it was listed permanently on an airbnb site and I use it occasionally as well?
Posted on 12/17/20 at 5:05 pm to HBomb
"Like Kind property" is left pretty open for interpretation by the qualified intermediaries who facilitate the transaction. As long as each property is income producing, most will be comfortable with the the exchange you described. Reach out to a few and bring a favorable opinion to your CPA who should then sign off on it.
This post was edited on 12/17/20 at 5:07 pm
Posted on 12/17/20 at 5:11 pm to HBomb
You got two issues.
1) If it becomes personal property, how do you get the 121 home sale exclusion (since your gain will be higher due to the deferred gain from the 1031 exchange).
2) How do you prevent the IRS from applying step doctrine and blowing up the 1031 exchange and forcing you to pay the tax on the gain in the exchange year (and this may happen on audit several years later).
In order to take advantage of the Sec 121 home sale exclusion, you have to hold the new property for 5 full years (in addition to having it be your personal residence for 2 years of those 5).
To make sure the IRS doesn't toss out the original 1031 exchange deferral, You have to prove that you intended to keep the new property as investment, but that situations changed after you acquired the replacement property.
There is a safe harbor available, the IRS won't toss the original 1031...
1) You have to own the replacement property for at least 24 months
2) divide that 24 month period into two equal 12 month periods
3) you must rent out the house for at least 14 days, at a fair market rent, during each period
4) your personal use can't exceed the greater of a) 14 days or b) 10 percent of the rental days, during each period.
If you fail the safe harbor, then you can try to argue facts and circumstances and intent at the IRS. There are no guarantees there.
I think your CPA has a right to be concerned, if you were my client, I would probably have you sign something saying your intention was to keep it as investment property. That's to protect me, by the way, not you =)
1) If it becomes personal property, how do you get the 121 home sale exclusion (since your gain will be higher due to the deferred gain from the 1031 exchange).
2) How do you prevent the IRS from applying step doctrine and blowing up the 1031 exchange and forcing you to pay the tax on the gain in the exchange year (and this may happen on audit several years later).
In order to take advantage of the Sec 121 home sale exclusion, you have to hold the new property for 5 full years (in addition to having it be your personal residence for 2 years of those 5).
To make sure the IRS doesn't toss out the original 1031 exchange deferral, You have to prove that you intended to keep the new property as investment, but that situations changed after you acquired the replacement property.
There is a safe harbor available, the IRS won't toss the original 1031...
1) You have to own the replacement property for at least 24 months
2) divide that 24 month period into two equal 12 month periods
3) you must rent out the house for at least 14 days, at a fair market rent, during each period
4) your personal use can't exceed the greater of a) 14 days or b) 10 percent of the rental days, during each period.
If you fail the safe harbor, then you can try to argue facts and circumstances and intent at the IRS. There are no guarantees there.
I think your CPA has a right to be concerned, if you were my client, I would probably have you sign something saying your intention was to keep it as investment property. That's to protect me, by the way, not you =)
Posted on 12/17/20 at 5:47 pm to HBomb
I have dealt with a lot of 1031s down here at the beach, the fact that it is rental or not is immaterial to meeting the criteria...find a new CPA
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