A house that is the owner’s primary residence cannot be traded for investment property. Nor do stocks, bonds, securities and similar equity investments qualify as "like kind." Likewise, if you own land and build a structure on it with 1031 exchange funds, the IRS will probably not consider your investment an exchange.
One of the more complex parts of the original regulations explains that within the 45-day period following sale of the investment property, you can identify three or more parcels of property, regardless of value, that you may wish to buy for your new investment.
In other words, you can consider taking the equity from your first rental house and reinvesting it in three or more new pieces of real estate without paying taxes.
However, if the number of parcels on your list exceeds three, and their combined value is greater than 200 percent of the property sold, you are required to buy 95 percent of the total sales price of the replacement properties.
To totally defer capital gains tax, you must pass the IRS’ acid test by:
- Trading even or up in value.
- Trading even or up in equity.
- Not pocketing any cash from the first sale.
- Identifying the new (or old) property (or properties) within 45 days of the sale. (This typically means having a signed purchase and sale agreement.)
- Closing the transaction within 180 days.
"In this environment, investors are thinking twice about reverse exchanges because they don’t want to take on the financial risk and the business risk," Helmick said. "They are wondering where their money would be better placed and if the property they bought for cash will retain its value or appreciate.
"It’s far more likely to see individuals tying up a property for as long as possible with as little as possible."
Tom Kelly’s book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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