Property sitting

1031 Exchanges
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Property sitting

Account Closed
Fresno, CA · Member since 2013 · 5 posts · 0 votes

If a property has been uninhabited for 5-6 years because we were waiting for the housing market to go back up before selling, is this property considered to be for investment in which case it would qualify for a 1031 exchange?

Thank you.

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Bill ExeterBusiness Member
1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
13y

Hi Judy,

Generally, yes. The important issue here is your intent. If you had the intent to hold for investment and were waiting for capital appreciation, then it would certainly qualify for 1031 Exchange treatment.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    13y

    Hi Judy,

    Generally, yes. The important issue here is your intent. If you had the intent to hold for investment and were waiting for capital appreciation, then it would certainly qualify for 1031 Exchange treatment.

    Exeter 1031 Exchange Services, LLC and Exeter Trust Company4.826 Reviews
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  • Account Closed
    OP
    Fresno, CA · Member since 2013 · 5 posts · 0 votes
    13y

    Thanks for the response Bill. In our case, the person living there was moved to an assisted care living facility back in 2007 and the time was not right for selling the house since the market was so depressed. It was previously the person's primary residence. Does this make a difference? Also, how "defensible" is the intent were we to be audited?

    Thank you.
    Judy

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  • Vicki M.
    Longmont, CO · Member since 2013 · 15 posts · 1 vote
    13y

    Judy, my experience from reading everything about the 1031 exchanges, and I have done three of them myself, is that a primary residence that has not been converted in use to a rental property is still a primary residence. To show the conversion to a rental you would need to have removed all personal possessions, advertised it for rent and no longer have personal use associated with it-i.e. is personal mail still received there or has a change of address for the owner been made? Since you can also hold personal property with the anticipation that it will increase in value before selling it, simply holding it while it increases in value doesn't by itself convert it to an investment property. Another thing the IRS will look at is whether you actually filed Schedule E for the property.

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    OP
    Fresno, CA · Member since 2013 · 5 posts · 0 votes
    13y

    Thanks Vicki.

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Vicki Mead,

    Judy Ikawa,

    You are not required to have had it on Schedule E. The fact you were still holding it after 5-6 years shows intent on waiting for the market to come back. It wouldn't be too hard to justify this with the market that was as bad as it was.

    -Steven

    [email protected]224-381-2660
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  • Vicki M.
    Longmont, CO · Member since 2013 · 15 posts · 1 vote
    13y

    Thank you@steven Hamilton II. I would not have thought the IRS was that lenient. Since the language for the 1031 exchange specifies that you must exchange "Like" properties-business property for business property and rental property for rental property and farm property for farm property-are you assuming that a personal residence held to increase in value has now converted to a rental, but not a business property or other property? I defer to your knowledge base, but I would still think you would need to show a little more intent to convert it to a rental before trading it for a rental than simply holding it to increase in value. But maybe I'm wrong.

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    OP
    Fresno, CA · Member since 2013 · 5 posts · 0 votes
    13y

    Thanks for the responses. My problem is that if the IRS were to audit such a situation, what is the burden of proof necessary to provide to them so that everything is legal. Is it just the retail market values for homes in that area through the waiting time period? Is that substantial "evidence" to prove that this was the "intent"?

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    13y

    I agree with Steven Hamilton II. You have held it long enough to show that you had the intent to hold for investment. However, I would like to see it on Schedule E to help support (prove) that it is held for investment purposes. Property does not have to produce income. You can acquire (or convert) a property and hold for appreciation. If you had only held it for a few months, and then sold it, I would be concerned that you would have a difficult time showing intent to hold for investment. Holding it for investment for 5 to 6 years is plenty of time to demonstrate intent.

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Bill Exeter,

    I don't see the Schedule E as an efficient point to prove intent for investment purposes. I do understand what you are saying; however, that can be a HUGE risk for the OP if they end up with a bad tenant.

    -Steven

    [email protected]224-381-2660
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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    13y

    Steven Hamilton II - Its just one more way to prove that your intent was to hold for investment. Its not the only way, and not exclusive, but certainly helps when you get audited. Not reporting it on Schedule E does not mean that it is not investment property, but certainly helps shows as part of your pattern of holding for investment. Actions are certainly the most important, reporting on Schedule E just helps support it.

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Bill Exeter, I agree that it can help; however, I'm simply saying that without holding it for rent I wouldn't list it there. Listed there I see it as a liability.

    -Steven

    [email protected]224-381-2660
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  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    13y

    Have you looked into the primary property rules? If you live in the house for at least 2 in the past 5 years. Your house is 250k or less single, 500k for married. Yo can sell the house and pocket the profit no questions ask.Talk to an accountant how this would affect an elderly women in an assisted living. This would probably work much better for you than an exchange. This wold also clear any tax off the gains. I she wanted to gift the money to her inheritants she could following the irs gift policies.

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  • Bill ExeterBusiness Member
    1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes
    13y

    Steven Hamilton II - I completely understand what you are saying.

    We have been involved in numerous audit matters and expert witness/deposition testimony where the fact that the investor did not report it on Schedule E was repeatedly brought up as evidence or proof that the investor did not have the intent to hold as investment property. We were just involved in a California Franchise Tax Board matter where the FTB was hitting this issue hard.

    Why do you think it is a liability if it is reported on Schedule E?

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    The audits that I've dealt with on the matter have asked the same question.

    Listing the property there opens it up for audit just by being there on Schedule E and then you have the possible issue of any deduction there without intent. I would not put a property on there with nothing listed just because I felt like it.

    The property taxes could be listed on Schedule A as a property held for investment.

    -Steven

    [email protected]224-381-2660
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  • Account Closed
    OP
    Fresno, CA · Member since 2013 · 5 posts · 0 votes
    13y

    @Elizabeth Colegrove - Yes, thanks. We have looked into that for this person and she does not qualify for that.
    Judy

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