What is my 1031 Basis?

11 Replies

I purchased a home for $7500 at auction. I have put $25K into the rehab of this property and am about to list the property for $70K. What is the basis when finding a "like kind" property of "equal or greater value?" The purchase price or the sell price? If it is the sell price, can I purchase a home for $50k and put  the remaining $20k into the rehab? 

Originally posted by @Rocky Griffin :

I purchased a home for $7500 at auction. I have put $25K into the rehab of this property and am about to list the property for $70K. What is the basis when finding a "like kind" property of "equal or greater value?" The purchase price or the sell price? If it is the sell price, can I purchase a home for $50k and put  the remaining $20k into the rehab? 

I am not a CPA and definitely not a 1031 intermediary (although both of those will probably show up here soon enough) however my understanding is that your new property must be equal to, or greater than the total value of the sale price of the current property. If you get something of lower value, or choose to pull out some equity, I believe you will have tax exposure on the difference. 

In this case, it's my understanding that you would need to purchase a property of the sale price minus transactional costs, AKA your net

Let's say you sold for 70K and paid out 5K in commissions. Your next property would have to be at least 65K to not have any tax exposure. 

@Vlad K. maybe this is something you can chime in on? 

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@Filipe Pereira Thank you Filipe!

@Rocky Griffin Unfortunately, I believe that rehab properties are specifically excluded, because fixer-upper properties are purchased primarily for sale. That means that any gain on sale would be taxable at ordinary income rates.

To avoid that, the property would have to be converted to rental property prior to the exchange.

You might want to reach out to one of 1031 experts on these forums for more information.

A Construction or Improvement Exchange allows an investor to use a portion of the proceeds from the sale of the Relinquished Property to improve or build on a newly-purchased Replacement Property. This approach works well if the Replacement Property is less valuable than the property being relinquished. When a Construction Exchange is structured properly, the improvement costs can be used to equalize the Exchange. During the §1031 Exchange, the Qualified Intermediary (QI) holds title to the property while the construction improvements are being done. All improvements must be completed within 180 days of the sale of the Relinquished Property.

Originally posted by @Rocky Griffin :

I purchased a home for $7500 at auction. I have put $25K into the rehab of this property and am about to list the property for $70K. What is the basis when finding a "like kind" property of "equal or greater value?" The purchase price or the sell price? If it is the sell price, can I purchase a home for $50k and put  the remaining $20k into the rehab? 

 Were you flipping this property?  If so you cannot do a 1031. Your basis is $32,500.

It has to be held for investment not as inventory.  Assuming it was treated as an investment you'll want to do some research on how you properly do a 1031 exchange. You will not be able to complete it in such a fashion. I would recommend talking to @Dave Foster or @Bill Exeter on the proponents of a 1031.

@Rocky Griffin , That's a handsome return.  Take it and pay the tax.

1. You cannot do a 1031 unless your intent in purchasing was to hold for productive use. It looks like your intent was to fix and sell which does not qualify for 1031.

2. When and if you decide to 1031 you'll need to use the services of a qualified intermediary who must be in place prior to the close of your sale.

3. It doesn't matter what your gain is in a 1031. If you want to defer all tax you must purchase at least as much as your net sale (the $75K minus closing costs etc) and use all of the cash generated in the sale (If there's no debt paid off then it is the same number as your net sale).

Hi @Rocky Griffin

The requirement is that you acquire and hold the property for rental, investment or business use.  Properties acquired for rehab and sale ("flipping") do not qualify because they were acquire and held with the intent to rehab and sell and not hold.  

You could buy, rehab and then hold and they would qualify for 1031 Exchange treatment, but not if you buy and hold for sale.  

The requirement is that you trade equal or up in value based upon your Net Sale Price, so about $70,000 in value in order to defer your taxes. 

Rocky, you cannot do a 1031 on this property. It is considered inventory and thus ineligible.

Your basis is your purchase price plus the cost of significant improvements (less depreciation, but that is not applicable here). Therefore, your basis is $32,500.

My original plan was actually to hold this property as part of my portfolio. However because of other opportunities I am looking to unload it. I do not know of any way to prove that sufficiently. Seems like a grey area that would call attention on myself from the IRS. 

Hello, according to the post. When You made a Flipping, this would be a base for taxes. In this case:

  • How much would the taxes be? 
  • What would be the base $ 32k or $ 70k, for this example? 
  • What would be the way to avoid paying taxes?

Hi @Rocky Griffin

I just find this on a website, probably is going to help you.

"What Qualifies?

Property held for productive use in a trade, business or for investment may be exchanged for like-kind property. For real estate, like-kind property is widely defined as real property located in the United States and some of its territories. A single-family rental can be exchanged for a duplex, raw land for a shopping center, or an office building for apartments. Any combination will work.

Real property and personal property are not like-kind to one another. A commercial building may not be exchanged for an airplane, a single-family rental for a licensed timeshare, or raw land for heavy construction equipment.

Personal property is evaluated based upon its nature and character, its General Asset Class, and NAICS classification. A school bus may be exchanged for a metro bus, a barge for a tugboat and a fleet rental car for a taxi."

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