Q. I have a house in Virginia I bought for $570,000 with $80,000 down. As quickly as I purchased it, my parents got sick, and I went to live with them in their house a couple of miles away.
I 'd like to buy another house in Florida and rent it out up until my parents die, and then move into it as my home. I 'd like to defer the taxable profit from the Virginia house utilizing the 1031 method. Is it possible for me to purchase two houses and use the exact same 1031 deferment?
You're on the ideal track. Utilizing a 1031 tax-deferred exchange ought to be a good choice for you in your scenario. As an investor in property, if you sell a property, you 'd need to pay taxes on the gains from the sale and taxes on any regain depreciation. To prevent paying any taxes at the time of the sale, an investor in real estate can set up a 1031 tax-deferred exchange with a company that focuses on these types of transactions.
Prior to you close on the sale, you established the exchange and have all of the earnings from the sale deposited with the tax-deferred exchange company. It doesn't matter just how much earnings you have, all of the profits from the sale ought to enter into the exchange. Following the closing of the sale, you'll have 45 days to designate a replacement property to purchase and then up to 180 days to close on the replacement investment property.
When you purchase the new property, you need to beware that you don't get any cash back on the purchase of that property. The new property's value need to be at least the value of the property you sold. And, if the replacement property's value is less than the value of the property you sold, you may have a tax to pay to the IRS. There's more, if the property you're offering is of higher value than the property you are purchasing, you can buy two or more properties and use the profits from the sale of the initial property to purchase others.
You'll just have to ensure you follow the 1031 guidelines for selling the original property and buying the replacement properties. You should be proactive when choosing to use the 1031 exchange guidelines in selling and buying replacement properties. If you've already closed on the sale, you can't choose to set one up after the closing.
Now, having said all that, those are the most fundamental rules and there are numerous other guidelines you 'd need to follow making sure that your 1031 exchange goes through and isn't really challenged by the IRS. One extra rule you must think about pertains to financing you had on the old property you offered and what funding you may get on the brand-new properties you are buying. As a really basic rule, you should keep things on a parallel track. If you sell a property for $570,000 and have a loan on it for $490,000, the brand-new property you purchase must cost at least $570,000 and have actually a loan gotten on it of no more than $490,000.
It should work for you but we 'd prompt you to work with a trusted 1031 exchange company that will make sure the money you transfer with them will come back to you when you buy a replacement property. Their consumers were injured in two methods: They lost their funds and ended up owing taxes on the sale of the property.
As you decide to acquire houses in Florida, you ought to bear in mind that 1031 exchanges are for real estate investors and not to be utilized for personal factors. Your intent should be to purchase investment properties. We hope you have actually represented your existing property as an investment property on your income tax return and you'll have to make sure you keep your personal affairs different from your investment properties. Please make sure to talk to your accounting professional so you comprehend how the 1031 exchange will influence your federal and state tax returns.
When you choose to reside in one of the properties you purchase years from now, you'll have to examine and see where the law stands on converting an investment property to personal use. You may have a tax to pay at that time or you might have a tax to pay when you sell the home later. As tax laws alter, you'll need to prepare ahead prior to you transform to personal use and before you choose to sell.
Good luck. Be sure you work with a certified 1031 exchange company, and maybe even work with a realty attorney to help and make certain the rules are followed exactly.
IlyceGlink is a syndicated columnist and real estate author. Samuel J. Tamkin is a Chicago-based real estate lawyer.