1031 exchange

[NotEasy]

Need help from 1031 exchange experts in this forum.

Taxpayer plans to sell a rental property and use the proceeds to purchase a house which he will let his daughter live in. Taxpayer has his own primary residence. Does it qualify as a 1031 exchange?

[Burke]

He can do a 1031 exchange from one rental property to another rental property. I assume he will be charging FMV rent regardless of who is living there. (If she is living there for free, it is not rental property, but a 2nd home to him, and it does not qualify for 1031.) Anyway, make sure he does NOT sell one and buy the other independently. He cannot take possession of the funds. They need to go through a qualified intermediary (QI), preferably someone who does these things all the time. And there are specific time frames which must be adhered to in the sale, purchase and identification of the replacement property.

[Gene V]

Agree with Burke,
Here is a link for basic and advance rules for 1031 exchange

https://www.1031cpas.com/1ten31Exchanges/3.50ten31ExchangeManual.htm

[WhiteOleander]

Also, remember the QI has your money, kind of like an escrow agent. If they bankrupt, you're in trouble. We had a huge QI company in TX that went belly up. So many people lost their money/property that the company held. It was a big mess.

[JohnH]

I'm sorry for the investors who are harmed to hear about the QI going belly up, but this is one of many objections I've raised over the years when clients wanted to do a 1031 exchange. I have generally insisted that if the gain was under $60K or so, they may as well report the gain and pay the tax. Anything less than that, and the fees plus the risks of doing it wrong made it too risky. Something could happen at the last minute with the replacement property to foul up the deal just before the clock runs out, or the QI might fold while they are still holding the client's money. Everybody's response is always the same - "we've got all that covered".

But what I often found was that people will take incredible risks (all out of proportion to the benefits) in order to save a few dollars of tax. The lure of sticking it to the tax collector is jsut too great for some people, plus it sounds cool to brag to one's friends at the club that "I made a bundle on the sale and didn't pay a penny in tax." And with a 1031 exchange, they aren't even saving any money - they're just kicking the can down the road and taking a chance that their tax rates will be higher when they finally must recognize the gains.

Maybe I'm just too simplistic about these sophisticated tax planning matters...

[ChEAr$]

Felt like murdering today

Client came to pick up return whereon he owed maybe 11,000 federal and 7,000 plus for
Georgia. He had sold one condo in FL and bought another closer home, both rentals.

NOW he informs me the whole deal was a 1031! AAGGGGHHHH!

[JohnH]

Harlan: That's odd. Most of the time they're bragging to everyone within earshot how much they made and how they beat the tax man. Guess he didn't think he needed to tell you, especially since all accountants have the power to read their client's minds...