Denver, CO · Member since 2018 · 6 posts · 0 votes
I'm new to this forum and appreciate your help. I have a second home we have owned since the mid 80's. I have two questions on a possible sale trying to avoid as much income tax as we can.
1. We had a fire at the house and have put $60K of our own money and $165K of insurance money into the home to repair it. When we sell the property, does the insurance money that was used to improve the home count towards our cost bases to limit our taxes? I'm assuming no but need to ask.
2. We have purchased a vacant lot and plan to build a replacement second home after we sell this one. Can we do a 1031 exchange and use that money to construct our new home? I've heard about an "improvement Exchange" to construct a replacement property but I don't know how it works.
@Corbin S. an improvement exchange could have worked but not if you have already purchased the lot. Now you would be exchanging into improvements on a lot you already own and that doesn't fly with 1031. You must sell and then purchase actual real estate.
In an improvement or construction exchange the QI takes title to the lot that you want to build on. You have a maximum of 180 days to complete whatever improvements or construction you'll be doing. Somewhere in the interim you sell your old property and then the proceeds are used to "buy" the now improved lot and construction from your QI. It's relatively expensive but gets you the perfect replacement property.