Possible 1031 Exchange

8 Replies

Question for the BP community,

A family member of mine recently sold a condo in Florida that they've owned for 2+ yrs and purchased another condo within a 2 week timeframe that was larger in size and more expensive. The condo that was sold produced a nice profit which in turn was used towards purchasing the new place. This new place is basically used as a vacationing home as was the older condo. From what I've read about 1031's, investment properties can be 1031 exchanged for "like" property when not used as a primary residence. Just wondering if this could've been used and if so, why wouldn't the agent/bank lender mention this. Thanks in advance. Randy

If the condo was not used as a principal residence (which sounds like it was not) and as an investment property then yes it would of qualified for a 1031 exchange. Bankers/lenders will generally not mention 1031's (the good ones will) as usually an agent/CPA or such will bring that up.

The trouble with 1031 exchanges is that some investors rush into an ok or even bad deal just to save some taxes which is something I would strongly advise against.

Big picture, vacation properties may exchanged.  However, there are some rules you need to be aware of in order to avoid in trouble with the IRS.  The IRC Code Section 280A(d) notes that your vacation home could be considered a rental as long as your personal use is less than the greater of 15 days or 10% of the number of days in a year during which the property is rented to someone else at a fair-market value rate.  

Thank you Austin and Drew for your insight.
As far as the actual use of the property, the family vacations there (even us) several times a year...maybe a combined total on average of 8-10 weeks a year. The other days of the year it is vacant with no rental or tenant use. Does this change anything? or in your opinion, still qualify for an exchange. Thanks again. Randy

Originally posted by @Randy Fountain :

The other days of the year it is vacant with no rental or tenant use. Does this change anything? or in your opinion, still qualify for an exchange.

In order to utilize a 1031 exchange the relinquished property (the property being sold) as well as the replacement property(ies) must be investment properties or utilized within a trade or business as it relates to real property.  So therefore based on your description, unfortunately no the property would not meet the requirements for a 1031 exchange.

Contact a qualified intermediary and they can explain in great detail what and how to facilitate 1031 exchanges.  There are many rules to be followed and strict timelines associated with this type of transaction, although this deal structure is a very powerful tool.

Thanks Howard, appreciate the response. Wasn't sure if this was possible or not even though these transactions had already happened last week. Something for me to learn more about as I begin real estate investing in the near future. Randy

@Randy Fountain , the issue is somewhat semantics, somewhat attitude, and somewhat guess work.

Technically speaking the only thing that qualifies a non-primary residence property for 1031is the intent to hold if for productive use in trade business or for investment. Semantically that means a 2nd home would not qualify but a property you purchased as an investment and used periodically for personal use would.  

The time restrictions that @Drew Reynolds mentions are to qualify the property as a rental allowing depreciation and mortgage interest deduction and does not speak directly to 1031 although there is a correlation.  

Some make the argument that holding for appreciation is investment and to a certain extent the IRS has tended to agree as long as there is also limited use and other patterns of documentation that demonstrate intent to hold for productive use.  But appreciation by itself is not a great defense in recent years.

The easy answer to qualify these properties is to allow a few rentals a year when they are not there.  Charge rent to friends and family members who use it.  When there's actual income on a Schedule it's hard to argue investment intent.

As to why a realtor banker or lender wouldn't have alerted them? All providers are not created equal. It was addressed for all of 30 minutes in a complete bachelors degree in accounting for me. It gets about 5 minutes of attention in real estate school. NAR designations give it a little lip service and there are folks like me who teach CEs for boards. So there's information out there for motivated agents to glean. But for the most part 1031 is still a dark art - although a dark art that can save you a lot of money in taxes.

Thank you Dave, I'll be taking notes from this discussion to share with my family should they decide to purchase another place in the future. Thanks again guys for your help on this. Randy

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