1031 Exchange on Property that was just done with a 1031 Exchange

2 Replies

Hey guys I need some quick advice and I am getting deflective answers from my CPA. Here goes:

I sold my rental property earlier in the year and performed a 1031 exchange. I bought a new rental property months later, however, I have not been able to rent it and the rent I can get for it is too low. I decided to sell the property and I am currently in contract. I was advised by the 1031 Exchange Agent to consult with a tax adviser wether its okay or not to perform another 1031 exchange. I was told it may be risky since it happened almost immediately. If I am unable to do another 1031 exchange, what are my options to help offset the capital gains (~150K). Can I buy a business? Can I buy another property using the gains? Thank you in advance!

@Justin Vedder , no ones going to give you a definitive answer because there isn't one.  the standard for 1031 is that you must have purchased the property with the intent of  holding  for productive investment use.  There is no statutory holding period - only your intent and what you can demonstrate for the intent if the exchange is challenged.

What are the possible pros and cons?

1. You purchased this property as a replacement in a 1031.  That is a regulatory declaration that you purchased it to hold for productive use.

2. You tried to rent it?

3. You talked to your cpa about your intent.

4. Your past practice and current business model is buy and hold.

5. . You held the property across a tax year so it is  on two consecutive tax returns.

6. The offer to purchase the property was unsolicited.

Cons

1. You haven't held it long.

2. You haven't generated rental income.

3. Your CPA isn't buying it.

4. You business model is that of a flipper and this is an "accident".

You can see how many things in your specific situation could go either way depending on what was actually going on.  That's why no one is going to go to the mat on this one.  But look in the mirror and if you can say with a straight face that your intent was to hold for productive use and some outside circumstance is causing you to change your intent.  Then go for it.  The worst would be an audit and loss of the exchange - pay the tax and pay some interest.  People don't get penalties when actions area taken rationally and defendably.

I believe that you should never do something you know is wrong just cause you can get away with it.  But you also should never not do something you know is right just because it might get questioned.

The qualified opportunity zones might be an option for you.  I'll leave those to brighter minds than mine.  Buying a business is not an option because that was eliminated from 1031 in the new tax code.  

There is one more joker in this deck and that is the autonomous actions of the CA franchise tax board.  They have a tendency to be a little more independent and not necessarily follow typical federal standards at the state level.  If you haven't held that property across a tax year at least they may be more aggressive in their dislike.  Your CA cpa can give you some guidance here.