DEAR BOB: About six months ago, I completed an Internal Revenue Code 1031 tax-deferred exchange, but I have not been able to rent the acquired house due to an oversupply of rentals in my area. Homeowners are having difficulty selling and are trying to rent while waiting for the sales market to improve. I am running out of money for my mortgage payments. Can I move into the house and rent my old home, which I can rent cheaply and still have a positive cash flow? Would I lose my IRC 1031 tax savings? –Dee D.
DEAR DEE: If you are audited by the IRS and have zero rental income to report from the newly acquired rental house on Schedule E of your income-tax returns, it looks like you did not have any rental intent at the time of the exchange. Instead, it would look to the IRS like you acquired the house with intent to make it your personal residence, thus disqualifying the tax-deferred exchange.
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Maybe the rent you are asking for the house is too high. Even if you have a negative cash flow for a while, that would be better than losing the tax deferral on the sale of your prior investment property.
What efforts have you made to rent the house? Do you have receipts for newspaper ads and other rental marketing efforts? That evidence could be important to the IRS.
Moving into the house and renting your current residence won’t look good if you are audited by the IRS. Also, you will be losing out on deducting applicable expenses for the rental house, including depreciation. For full details, please consult your tax adviser.
IF LENDER FORECLOSES, WILL OTHER PROPERTIES BE AFFECTED?
DEAR BOB: I own two properties. If the bank forecloses on one property, will it impact my other property or my principal residence? –Ramesh A.
DEAR RAMESH: If you lose any property by foreclosure, your credit will be ruined. Mortgage lenders don’t like to see a foreclosure on your credit reports.
However, unless you have a blanket mortgage on all your properties (very rare), loss of one property by foreclosure won’t affect your other properties. For more details, please consult a local real estate attorney.
MUST POWER COMPANY MOVE OVERHEAD ELECTRIC LINES?
DEAR BOB: I want to install a swimming pool in my backyard, but there are electric power lines above the area and a power pole on my property. Can I sue the electric company because I cannot build my pool due to their encroachment over my yard and above my home? –Manda B.
DEAR MANDA: When you purchased your home, you were obviously aware of the overhead electric power lines and the easement (not encroachment) over your property. The power company is not liable to you for damages, nor can you force the removal of the wires that are involved in the easement.
However, you could offer to pay the power company to move their wires so you can build the swimming pool.
The new Robert Bruss special report, “How to Profit from Lease-Options (Rent to Own) Whether You are a Property Buyer, Seller or Realty Agent,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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