I want to do a 1031 exchange on an investment property I will have held for 2 years as of 4/1/18.
First, should I wait until after that date to enter into a realtor contract to sell the property to insure that I get the presumption that my intent has been to hold it as an investment property? It was previously my primary residence before renting it out.
Second, I have identified a property that I would like to acquire with the proceeds of the exchange. If I enter negotiations and submit a letter of intent to the sellers BEFORE the relinguished property is under contract, will that invalidate the 1031.
@Wendy Van Camp You've probably already considered this, but I figure it's always worth double checking! You mentioned this property you are selling was your primary residence before. You didn't live in it for 2 of the past 5 years?
Yes, thank you for asking. I will be taking advantage of the 121 provision.
@Wendy Van Camp , There's no statutory holding period. Two years has been mentioned in several forms by tax court but that two years has encompassed two full years, over two tax years and in two calendar years. So the line is plenty gray that I don't think you have issues with listing to sell after 22 months. Most folks feel comfortable with anything over a year.
Also, the statutory order of the 1031 is sell followed by buy. Going into contract for the purchase before your sale does not hurt you at all. In fact it may strengthen your case. You didn't intend to sell but found the perfect replacement property .....
@Josiah Collins , Since Wendy qualifies for both the 121 and 1031 she can do a 1031 on the amount over the $500K exemption and get the best of both worlds. She gets tax free from the primary residence exemption. And tax deferred on the rest of the gain and depreciation.
@dave foster, does the earnest money for the purchase of the new property have to come from the sale proceeds of the relinquished property?
@Wendy Van Camp , You can put earnest money down from any source. You then have a couple of choices when it comes time to close.
1. You can leave it in the purchase if you're buying more than what you sold.
2. We can put a line on the settlement statement called "return of earnest money" so that comes back to you and only exchange proceeds go forward in the purchase.
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