Posted by Ronald * Starr(in No CA) on April 21, 2003 at 07:33:54:
Oscar O----------------
Well, then, your intent is to not hold it as a rental property, right? Your intent is to pretend that you are doing a legitimate 1031 exchange so you can fool the IRS and not pay the taxes that the tax laws of the country say you should pay. So, if the IRS disallows it as a sham, how would you respond? And remember that the IRS enforces the laws with the concept of “substance over form,” meaning that don’t care what the deal looks like, they interpret the deal in their own way (probably, I’d guess, toward their goal of maximum tax collection, rather than helping you pay less taxes).
Look, why don’t you just honestly exchange into a rental property–maybe a multiple unit one? If you are interested in getting money to buy a personal property, buy an income property with good cash flow and with as low a loan to value ratio as you can and still make the 1031 be totally tax free. Then, save all the income your can from the property and in a year or so refinance or add a second loan to the income property. Use the income and loan proceeds to buy your family property.
Or, just sell the income property you have, pay the capital gains taxes you owe and use the remaining proceeds to pay for your new personal residence.
Either way, you rest comfortably knowing that you not only operated within the letter of the law but also within the spirit of the law. You can be relaxed that you will not face problems and questions from the IRS.
Most financial advisors are more conservative than is Robert Bruss. The usual recommendations are to hold the exchanged-into property at least a year, at least two years, or into a different tax year. But really, while these suggestions may work, it seems to me that they miss the important point: the intent at the time of the exchange. If your intent is to swing the equity in your income property into a personal residence, that is not a proper use of the 1031 exchange exception to paying capital gains tax on the sale of income properties.
I do not like the way that the law is written. I think “intent” is a very poor criterion for making judgments. It is hard for the taxpayer to know what to do and to be assured that one has complied with the law. However, that is the law as it is written at this time.
So, if you want to convert your current holdings from rental to personal use, I’d recommend the two approaches I mentioned above. Oh, wait, there is still a third possibility. Refinance the current property or add a second loan to it. Then use the loan proceeds to help you buy your personal home. Again, perfectly legal. No concern about IRS decisions impacting your family.
Good Investing*Ron Starr