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Lane
Lane, JD, CFP, MBA, CRPS
Category: Capital Gains and Losses
Satisfied Customers: 10095
Experience:  Have been providing Financial and Tax advice for 30 years.Concentration in Corporations, Estate, Income Tax and Business Planning
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Lane May I have a further question on it, pls? If the person

Customer Question

Hi: Lane
May I have a further question on it, pls?
If the person wants to sell a resident rental property, and wants to buy a future house (meaning to pay down payment to the builder, and the house may be built up years later). Would the transaction still qualify for 1031 exchange?
My understanding is before the new house is built up completely, it's inventory instead of capital asset, right?
Thanks,
Submitted: 15 days ago.
Category: Capital Gains and Losses
Expert:  Lane replied 14 days ago.

Hi .. I'm sorry ... I think they've (JustAnswer) has been having some site trouble over the last few days.

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(Iv'e already answered this once)

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Maybe this one will get through.

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It's not about how long it takes to construct, it's about whether you closed on the property or not.

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If you closed, and paid enough (regardless of how you financed it) - said differently, if the sales contract was for enough - then it still qualifies.

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With planning, there are several ways to successfully defer all of the gain even when providing seller financing but in order to use any of these options the Note must be between the Buyer and the qualified intermediary (QI) and all payments must be made payable to the QI. The options are as follows:

  • The Exchanger could buy the Note from the QI so the funds can be deposited into Exchanger’s 1031 exchange account and available for acquisition of the replacement property. This can be done anytime during the exchange period before the replacement property is acquired.
  • The Note is due within 180 days of Buyer’s acquisition of the relinquished property so all funds are on deposit before the Exchanger is ready to acquire the replacement property.
  • The Seller of the replacement property can take the Note as part of the consideration for the replacement property. Yes, this does actually happen sometimes!
  • The Note can be sold on the open market and the funds deposited in the exchange account before the Exchanger is ready to acquire the replacement property. Keep in mind that when a Note is sold, it is typically purchased at a discount.
Expert:  Lane replied 14 days ago.

Also under section 453 of the tax code, you can defer the gain over the life of the Note as long as at least one payment is received in the following tax year.

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Taxes will only be due based on the amount received each year. An installment sale can provide a steady income stream and you can work with your tax advisor to minimize the tax consequences.

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With this structure, the Note is between the Exchanger (Seller) and Buyer. All payments will be paid directly to the Exchanger and the amount of this Note will be excluded from the 1031 exchange.

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Here's great article on this: http://www.1031corp.com/1031-exchange-resources/1031-exchange-articles/installment-sales---1031s-successfully-working-together

Expert:  Lane replied 14 days ago.

hopefully this one got through :0)

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Please Let me know if you have ANY questions, before rating me.

But if this HAS helped, and you don’t have more questions on this, I’d appreciate a positive rating (by using those stars on your screen, and clicking submit)

Thank you,

Lane

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