Can Vacant lot be Sold as a 1031?

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Can Vacant lot be Sold as a 1031?

Achi Adamit
Residential Real Estate Broker · Teaneck, NJ · Member since 2015 · 61 posts · 15 votes

My partners and I are in contract to sell a small vacant lot in Philadelphia for $35,000, which we bought a year and a half ago for $20,000.  

I know its not a lot of money, but I was hoping I'd do a 1031, but I was told that in order to be qualified for a 1031 the property should have been "for investment purposes" which usually means for rental, which it was not.

Can someone clarify here?  Keep in mind this is in Philadelphia PA.

Thank you!

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
9y

@Achi Adamit, if you had the intent to hold that lot while deciding how to ultimately handle it and didn't do something like have it listed for sale the entire time you should be able to do a 1031.  Income production is not a requirement to be eligible for 1031.

Where you'll have issues is that Pennsylvania does not recognize the 1031 exchange for deferral of state taxes.  You'll be able to defer federal however and that would create a net benefit as long as the 1031 didn't cost you an arm and a leg (figure 750 for one).  Whether or not that is worth it to you is strictly your preference.

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  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    9y

    @Achi Adamit, if you had the intent to hold that lot while deciding how to ultimately handle it and didn't do something like have it listed for sale the entire time you should be able to do a 1031.  Income production is not a requirement to be eligible for 1031.

    Where you'll have issues is that Pennsylvania does not recognize the 1031 exchange for deferral of state taxes.  You'll be able to defer federal however and that would create a net benefit as long as the 1031 didn't cost you an arm and a leg (figure 750 for one).  Whether or not that is worth it to you is strictly your preference.

    The 1031 Investor5137 Reviews
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  • Al D.
    Investor · San Francisco, CA · Member since 2017 · 303 posts · 327 votes
    9y
    I am not an attorney/accountant/etc. The following is not legal advice, and is only intended to guide you. I don't know anything specific about Philadelphia. 1031 IRC is a federal law. Going to the source: https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031 (Read "What property qualifies for a Like-Kind Exchange?"), I'd say that you qualify. Since you mentioned partners, from my understanding: if you keep the integrity of the partnership (all partners selling will be the same partners buying - and under the same partnership name,) this should be an easy exchange. You may, however, need to do extra work if not all partners selling will be participating in the purchase in the exchange - not all gains are tax deferred. Your 1031 QI should be able to answer this question - but they do not give legal advice. I am not an attorney/accountant, etc.
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  • Al D.
    Investor · San Francisco, CA · Member since 2017 · 303 posts · 327 votes
    9y
    Forgot to mention that whether the vacant land qualifies as an "investment property" depends on the purpose for which you bought/used it. Assuming that you did not set up a tent for yourself (or any of the partners) and lived there, I'd say the vacant land qualifies. Reminder: I am not an attorney.
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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    9y

    It might not make sense to do a 1031 exchange.

    In PA, state income tax will be due on the gain even if you do a 1031 exchange.

    You will have to pay a qualified intermediary (QI) to handle the 1031 exchange; that might run in the ballpark of $1000 or so.

    If you already held for a year, you are now into long term capital gains tax rate rather than short term. So your tax deferral might be very small on that 15K or so gain, and you get to reduce that gain by costs you incurred over that year, and then subtract the QI fee to see what you are "saving" but really deferring. Might not be worth the effort.

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