We are considering selling a property and have some 1031 exchange questions with regards to IRS expectations. We would be moving from multi-family property to much different areas and states. However, there are too many paths for me to explore them all and figure out where we want to go. So, I want to start with - what is possible? Here are options we are looking at, but not sure where I should spend my time researching if the IRS won't allow it..
- If we buy a piece of land that has logging rights (or other mineral rights), what are the rules around how long the land must be physically logged for the exchange to be valid? If it's a 50 acre plot that only takes a few weeks versus thousands of acres that might take a year or two? Does the size of the plot of land matter? Once the trees are gone, then what? If we don't sell it, can it ever go to personal use or would that still need to be 2 years later? Is this consistent across all mineral types?
- If we buy a couple thousand acres of ranch land, but it is only used for grazing in the summer, is that sufficient? We might be able to use it for hunting and winter sports depending on the area we buy in.
- If we buy a couple thousand acres of ranch land, but want to turn it into a wind or solar farm, how quickly does the land need to become active with the actual farming of natural resources? I've heard in some states it can take years to get approval for such renewal resource farms, so what are the hard limits I'm looking at to make it profitable?
- Can we buy an RV that we move to whatever campsite the guest has reserved (lots of glamping tourists) would that be considered an exchange - airbnb of an RV? Would we ever be able to have personal use on non-rented weekends or stop after a couple of years to turn the RV into personal property? It's a depreciating asset, unlike physical structures, so I'm not sure this is something we can do. However, some RVs are considered primary residences, so that's where my confusion comes in.
- Our current primary residence was a rental for us from April 2012 until June 2016. We moved into it June 2016. Are we able to sell this house to the 1031 exchange business at fair market value, paying any capital gains from the sale (because it was a rental first and purchased after 2009), and rent it back to ourselves from the business at market rent for about 6 months before moving into our new house? This is the one I think might be a no, but the IRS would get capital gains on about $150K in profit (2/3 of about $250K in profit), so maybe it's legit. We'd legally rent it back from January 2019 through May 2019 and be moving out of state turning it back into a rental.
I'm not looking for "that's a bad idea" - I'll come up with those conclusions on my own . I'm trying to rule out the ones the IRS will frown upon and not allow as an exchange or the rules around what the IRS expects.
Hey @Cary P. , Your first 4 questions are all about the use requirement. You want to remember that there is no statutory holding period or qualified use period that qualifies a property for 1031. It is your "intent to hold the property for productive use in business trade or for investment" that matters. Trees take a long time to grow. If you harvest them and plant new ones are you holding for productive use - seems like it to me.
By the same token, If the hunting season is short and the winter is long in the Yampa Valley does that mean that a property you put into Cabellas Preferred hunting lease program isn't being held for investment when the Elk are in Utah and snow is on the ground - nope, that's still being held for productive use awaiting the next season.
It's the same as any agricultural land. Sometimes it's planted and sometimes it's fallow but it's always investment. Or a vacation rental in FL. Not much use in August and September but it doesn't change it's character and become non-investment during those months.
So I would venture that all of your examples could very easily be demonstrated to be held with the intent of productive use whether or not they generate revenue quickly or consistently throughout the year.
But the RV is another story - It's not real estate so it doesn't qualify for 1031 treatment (although I do love that idea if you'll forgive me. There's actually a guy already doing that in CO and we almost booked him. He takes the RV where you want it.) If you're renting an RV that is attached to a piece of land you own then it becomes real estate. But as long as you receive registration and plates every year it's not real estate so a non-starter for 1031.
You don't want to play games with the IRS and renting back to yourself etc - especially when the rules are in your favor anyway. You can't sell and 1031 your primary residence so you'd have to move out for a year or two and then sell and1031.
You meet the use requirement for the primary residence exemption now. So you can sell and take a prorated share of the $500K profit maximum tax free. No need to sell and then rent back etc. You rented it for 4 years and have lived in it now for 2 years so you would recapture depreciation from 2012 - 2016 and would get 2/6ths (1/3rd) of the gain tax free.
OK, cool!! I figured the RV and personal home were non-starters.. Thanks for clarification on the rest!! It narrows my focus. We're looking into logging rights and ranch land as possible exchanges, but we want to have our research squared away before we get locked into 45 days.
I went from farmland to a house on my 1031, no one said a thing, well other than why are you going out of state but that's a different story lol.
We are exploring out of state, as well, as Colorado is just too hot. I don't want multi-family and I already understand NNN, so I'm just exploring other "outside the box" options that are low impact and very passive. Dave's already chimed in, he was first. He gave good input, in other words, the land is all good, regardless of how it is used, but the RV and personal are a no-go. Which is what I figured, but it spares me from that research, which is good.