1031 IN SHELL KNOB?
There are Shell Knob residents growing their nest egg by use of an IRS Ruling known as a 1031 , but can it be applied to a vacation home on Table Rock Lake?
Normally when you sell property, you receive either a gain or a loss in the transaction. If it is a gain, you pay tax on it. Section 1031 of the Internal Revenue Code (IRC), however provides an exception to that rule.
Instead of selling property, paying taxes on it, and then using the reduced after-tax proceeds to buy other real estate, IRC & 1031 allows the deferment of capital gains tax which would normally be owed on the sale of that property.
This allows the full reinvestment of your sale proceeds. The amount not paid in capital gains tax to federal and state governments creates more equity in your investment. Tax deferment increases the availability of your money which can be invested into better property(s) of greater value. Tax deferment is leverage and this creates wealth.
A recent article by Joanne Hanson, Court Rules Against 1031 Exchanges For Vacation Homes,showed that the court sets limitations on this use. Most people anticipate that their property will appreciate in value, but the May 30, 2007 decision by the US Tax Court said that :" The mere hope or expectation that property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence."
So now the vacation home owners will have to rent out the cottage at least part of the time to be able to take advantage of the tax break. That being said, you need to consult with your tax advisor to clarify your position.
Joan Snodgrass Tri-Lakes Realtors, Shell Knob, MO
;)
;)
Joan--This is a very important and informative post! Good information1