Posted by Nate(DC) on January 16, 2003 at 10:07:56:
Well, let’s say for the sake of argument that his $100K house costs him $80K. So he is willing to take this land off your hands for $80K.
I still submit that it would be easier to sell him the land for $80K and then do the exchange. He gets the land for the same price, without having to do ANY work, and you don’t have to incur all those extra closing costs etc. after which your net would be closer to $80K than $100K anyway.
Unless he ALREADY has a house he built, that is just sitting there, and he needs to get rid of it, in which case you should be negotiating harder…but it sounded like you said he was going to build for you.
But to answer your original question - there is no statutory minimum time. As a “safe harbor” many accountants like to say a year of holding, but according to the IRS Code, as long as it is held for a trade or business (i.e. not with the intention of immediate resale), it qualifies.
Doing A 1031 Several Times?? - Posted by Tony S. in FL
Posted by Tony S. in FL on January 15, 2003 at 21:13:07:
My question is once you do a 1031 exchange, how long must you wait until you can exchange that property again?
I’ve got a tiny rental house in another state on property that was rezoned commercial and appraised at 100K. The puny amount of rent it brings in is way under what a 100K property should bring in.
A local builder is willing to build a 100K house and do a swap with me. However, a 100K rental there still will not bring near as much as one here in Florida. I’d like to exchange that house for one here in FL as soon as possible.
The idea is that you are holding a property as an investment, thus, you intend to hold for a long term. You cannot do a 1031 exchange out of or into a property for which your intent is to not hold as an investment. So, exchanging into the new house built by the contractor with the intent of not holding it is not permitted.
I would suggest that you do it this way: agree with the contractor that you will sell your current property for $100K and you will accept the newly-built house as worth the purchase price. Then, when he has the newly-built house about finished, you find a house in FL you want to hold as an investment. You have the buyer of the newly-built house put the $100K into escrow and buys your old property. That buyer than trades your old property over to the builder, so the builder has has exchange situation, if that is what he is trying to do. The cash out of the sale to your old house is then used to purchase the new property that you acquire in FL. Now, if the builder does not need/want to do an exchange, You could have him just buy your existing house and then you do a delayed “starker” exchange into your FL replacement property.
Otherwise, how long to hold the newlybuilt house to show intent of long-term holdings? As the others said, there is no guideline in the IRS regulations. Concervative CPAs recommend over 2 years, aggressive ones may say 6 months or a year. I have hear the suggestion that the acquisition and the devestiture of the intermediate property be done in two different tax years.
Don’t quote me on this, but I was told by a very experienced investor I work with, that a good rule of thumb that most CPA’s use is a year and a day is the minimum, but 2 years is what he recommends. From what I understand there is no set time frame.
Posted by Nate(DC) on January 15, 2003 at 23:08:21:
Tony,
A 1031 does not have to be a “direct” exchange - i.e., you give someone a property and they give you one in return. You can by-pass the local builder entirely - just sell him the property and have a qualified intermediary hold the sales proceeds. Then, use the sales proceeds to buy a rental in FL. No “intermediate” property needed.
Posted by Tony S. in FL on January 16, 2003 at 04:34:08:
Yeah, I realize a 1031 doesn’t have to be a direct exchange.
The only way the builder will purchase the property is exchange it for a house he builds. See, he wins because the 100K house he builds doesn’t cost him 100K. I win because I get rid of a sub-performing rental at market value (and because he’s the only one to make an offer).