Special offer

WHAT IS A 1031 EXCHANGE

By
Services for Real Estate Pros with Midamerica Referral Network


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? 

House vs Taxes Scale

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.


Comments(8)

Teri Eckholm
Boardman Realty - White Bear Lake, MN
REALTOR Serving Mpls/St Paul North & East Metro
Joan--This is a very important and informative post! Good information1
Jun 05, 2007 12:14 PM
Joan Snodgrass
Midamerica Referral Network - Kimberling City, MO

Teri:

Thank you.  I actually got the idea from Joanne Hanson and her post.  Than remembered one local who was doing this, etc   And everything IS local.  Right?

Jun 05, 2007 03:43 PM
Anonymous
Scott

The best way to play the game is to use 1031 exchanges, but it's a tedious process and not many people know how to work the deal.


Defer'Em is one of the best resources for being able to understand the tedious stuff – boot, taxable gain, deferred gain, and new cost basis – and it has a tool you can use to generate IRS Form 8824 for reporting Like-Kind Exchanges on your tax return. Defer'Em is a guided approach that helps you optimize deferrals using all deductible closing costs and exchange fees, and it also generates an Exchange Report which will help you visually understand all the elements of your exchange.

Another benefit is that you can play with the numbers and get familiar with different exchange scenarios, so even if it's going to be a while before you play the capital gains game, you can always practice… just remember, practice makes perfect.

Jun 29, 2007 10:06 AM
#3
Joan Snodgrass
Midamerica Referral Network - Kimberling City, MO
Scott:  Thanks so much for the heads-up on 1031's.  Will definitely check into Defer'Em.  Sounds interesting.
Jun 30, 2007 06:43 AM
Joan Snodgrass
Midamerica Referral Network - Kimberling City, MO
Scott:  Thanks so much for the heads-up on 1031's.  Will definitely check into Defer'Em.  Sounds interesting.
Jun 30, 2007 06:44 AM
Joanne Hanson
Coldwell Banker Colorado Rockies Real Estate - Frisco, CO
Summit County, Colorado Realtor
And now the new bill on Mortgage Forgiveness Debt Relief for people who are having to do short sales will affect Second home owners in a negative way (possibly) .  I will be posting on it tomorrow or later today. 
Oct 13, 2007 05:28 AM
Bill Exeter
Exeter 1031 Exchange Services, LLC - San Diego, CA
1031 Tax-Deferred Exchange Expert
You are so right.  There has always been confusion and conflicting opinions over vacation properties.  I wrote an article on it at http://www.exeter1031.com/article_vacation_property.aspx.
Nov 20, 2007 04:35 AM
Joan Snodgrass
Midamerica Referral Network - Kimberling City, MO
William:  You are THE EXPERT!  I copied your info and have placed it in my 1031 file.  Thank you very much.
Nov 20, 2007 07:18 AM