1031 Exchange Information

1031 Exchange information and Book
by Robert Bruss 

INVESTOR DOESN'T WANT TO MOVE INTO RENTAL HOUSE TO SAVE TAX

DEAR BOB: I own my home and a rental house. I want to sell both. But I don't want to move into the rental house and have to wait 24 months to avoid capital gain tax on its sale. Is there another way to avoid taxes on the sale of the rental house, such as offering it as a gift or bequest to my daughter so she can sell it? – Rudy F.

DEAR RUDY: As you probably know, to qualify for the Internal Revenue Code 121 principal residence sale capital gain tax exemption up to $250,000 (up to $500,000 for a qualified married couple filing jointly), you must have owned and occupied your primary home at least 24 of the 60 months before its sale.As for the rental house you want to sell, you could defer capital gain tax by making an Internal Revenue Code 1031 tax-deferred exchange for another investment or business property of equal or greater cost and equity. If you are tired of "tenants and toilets," you might want to exchange it for a TIC (tenant-in-common) share of a net-leased property, which gives you monthly rental income but no management work. If you gift the rental house to your daughter, as the donee she will take over your presumably very low adjusted cost basis for the rental house. When she sells the rental house, unless she makes it her principal residence to qualify for the IRC 121 exemption, she will have to pay the profit tax. In other words, such a gift shifts the tax burden to her.To make a bequest to your daughter in your will, that means she won't receive title until after you die. That could be advantageous for her because she will then receive a new "stepped-up basis" of the rental house's market value on the date of your death. For full details, please consult your tax adviser.

MUST EXCHANGE PROPERTY BE RENTED ON THE DAY OF TRADE?

DEAR BOB: A few weeks ago, you said that for an Internal Revenue Code 1031 tax-deferred exchange to occur, the acquired property must be rented on the first day of ownership to qualify. My exchange agent says this is not correct. Please elaborate – Barry S.

DEAR BARRY: To qualify for an IRC 1031 tax-deferred exchange, the "like kind" acquired property of equal or greater cost and equity must be held for investment or use in a trade or business. As I recall, the reader wanted to trade out of an apartment property for his ultimate dream home. I said the acquired property must be a rental property and the up trader could not acquire a personal residence.However, after the acquired property has been rented (to show rental intent at the time of the exchange), the owner can make a tax-free conversion to a personal residence by moving in. Most tax advisers suggest renting the acquiring property at least six to 12 months after the tax-deferred exchange.Your exchange agent is correct that the acquired property doesn't have to be rented to tenants at the moment of the exchange. But it must at least be held available for rent and the exchanger cannot move in immediately to make it his/her personal residence. For further details, please consult your tax adviser.

The new Robert Bruss special report, "The Seven Best Ways to Legally Avoid Capital Gains Tax When Selling Your Home or Investment Property," is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF download at www.bobbruss.com. Questions for this column are welcome at either address.

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