DEAR BOB: In 2001, my wife and I moved into our new home. Since then, my previous home, which I still own, has remained vacant and un-rented. I now want to sell it and transfer the sale proceeds into another home and place it on the rental market. Must I rent my former personal residence before I can sell it? Or, can I sell it now and meet the rules for an Internal Revenue Code 1031 tax-deferred exchange? If not, how long must I rent it to qualify for a tax-deferred exchange to avoid capital gain tax? –Robert A.

DEAR ROBERT: To qualify for an Internal Revenue Code 1031 tax-deferred exchange, both the old and acquired properties must be held for investment and/or use in a trade or business. A vacant house doesn’t fall into either category.

Purchase Bob Bruss reports online.

Although IRC 1031 doesn’t specify a minimum rental time, most tax advisers suggest renting a property at least six to 12 months before selling it as part of a tax-deferred IRC 1031(a)(3) “Starker exchange.”

That means you can sell your old rental property, have the sales proceeds held by a third-party intermediary beyond your “constructive receipt,” and then use that money to acquire a replacement rental or business property of equal or greater cost and net equity.

You must designate the replacement property within 45 days of selling the old rental property and complete the acquisition within 180 days. Of course, you must trade equal or up in both price and net equity. For more details, please consult your personal tax adviser.

WHEN NEGOTIATING WITH CUSTOM HOME BUILDER, YOU NEED A REAL ESTATE ATTORNEY

DEAR BOB: I have purchased land and plan to build a custom home. Beyond interviewing and researching the backgrounds of several local general contractors, they have presented me with their contracts ranging from a firm fixed price to cost plus with a 15 percent fee. Is there a source of “boiler plate” contracts that are balanced between the contractor and the homeowner? –Frank C.

DEAR FRANK: Please consult a local real estate attorney who has experience with custom-home construction contracts. This is not a do-it-yourself project.

The contractors have the advantage over you. You need an attorney to point out the pros and cons of their proposed contracts and then prepare a contract that is acceptable to both you and the contractor.

DON’T PUT ALL YOUR (CASH) EGGS IN ONE (HOME) BASKET

DEAR BOB: I recently came into a significant inheritance. It will enable me to buy my first home. But a friend showed me a recent article where you said not to pay all cash for a house or condo just in case it turns out to be a “lemon.” This inheritance is all I have so I can’t afford to be careless. How much of it should I use for a down payment? –Agnes H.

DEAR AGNES: Just in case you buy a “bad house” or a “bad condo,” I don’t want you to have paid all in cash and discover you were a sucker and are stuck with an unsaleable property.

Instead, make a modest 20 percent or 25 percent cash down payment, and obtain a 75 percent or 80 percent first mortgage. If all goes well, and after a few years you are satisfied with your home purchase, then you can pay off the mortgage. Just be sure there is no prepayment penalty in the mortgage you obtain.

The new Robert Bruss special report, “The 20 Essential Questions Smart Home Buyers Must Ask to Avoid Overpaying in a Buyer’s Market,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant delivery at www.BobBruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

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