1031 exchange ? or not


K

kade714

Question:
I have a single family residential that I'd like to sell and then use
the proceeds to buy a 4-plex. I live in Southern CA. I have never
reported the income from this rental and never claimed any expenses
for it. I used to live in this home - for over 2 years - and would
like to sell it within 3 years to take advantage of the 1031.
My question is: can I now submit a 1031 exchange for this
transaction? Or is there some type of paper trail that is needed to
prove something?
Can someone help? I have no idea of tax law or 1031's.
Thanks everyone.
 
P

Paul Thomas, CPA

I have a single family residential that I'd like to sell and then use
the proceeds to buy a 4-plex. I live in Southern CA. I have never
reported the income from this rental and never claimed any expenses
for it. I used to live in this home - for over 2 years - and would
like to sell it within 3 years to take advantage of the 1031.
My question is: can I now submit a 1031 exchange for this
transaction? Or is there some type of paper trail that is needed to
prove something?
Can someone help? I have no idea of tax law or 1031's.



For starters, you should go back and file amended returns to report the
income and expenses (including depreciation) on those years that you rented
the property.

If you lived in the home as your primary residence for two of the five years
prior to the sale, then up-to $500,000 ($250k if you're single) of any gain
is tax free. Some of the gains however, the amount related to the
depreciation taken or that should have been taken, will be taxable to you.

If you're out past that five year window, then all of the gain would be
taxable.

You could do a Section 1031 exchange for like-kind property, meaning you
sell the rental property and buy other investment/rental property as a
replacement. Talk to a reputable firm in your area to advise you and handle
all that, as the rules are very strict on timing and who holds the sales
proceeds.
 
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1031 Exchange Possible

Yes, you can certainly 1031 Exchange the SFR that you have held as rental property into a fourplex that is also held for rental. The Treasury Regulations require that you have the intent to hold the property you are selling and the property that you are acquiring for rental, investment or use in a business. So, since you have rented the SFR and are planning to rent the fourplex, you have a valid 1031 Exchange.

However, you have done yourself a disservice by not reporting the property as rental property, including and especially taking the deduction for depreciation. You must ultimately report the depreciation as recapture when you sell and cash out in the future (stop 1031 Exchanging). You should meet with your tax advisor to determine whether or not you should amend your prior returns.

You may also qualify for the 121 Exclusion (Section 121 of the Internal Revenue Code) if you can say that you have lived in the property for a total of 24 months out of the last 60 months (does not have to be consecutive). If you can, then you would be able to exclude up to $250,000 in gain if you are single ($500,000 in gain if you are married) from your income.
 

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