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Merlo
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Category: Tax
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Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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I have a question about Like Kind Exchange 1031. I sold a

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I have a question about Like Kind Exchange 1031. I sold a convience store in May 2009. I have started on building a car wash on a property that i had bought 2 years ago. The cost of car wash would be $100k more than the business i sold. So my question is, can this be classifed as a Like Kind Exchange. If it is, what are all the necessary steps i need to do and time frame limits if there is one? Thanks in advance.
Submitted: 7 years ago.
Category: Tax
Expert:  Merlo replied 7 years ago.
Hello paradise,

With a 1031 exchange, the transaction must be identified in advance of selling the first property.

A Qualified Intermediary must be used to handle the proceeds of the sale from the first property and the purchase of the replacement property.

Replacement property must be identified within 45 days of the first sale and the purchase of the second property must be completed within 180 days.

To qualify as a Section 1031 exchange, a deferred exchange must be distinguished from the case of a taxpayer simply selling one property and using the proceeds to purchase another property (which is a taxable transaction).

If you did not identify your intent to treat this as a 1031 exchange prior to the sale of the first property, and the proceeds from the sale were not handled by a qualified intermediary rather than being paid directly to you as the seller, then this transaction would not qualify under the 1031 exchange rules.

Here is a link to the IRS website which discusses the various rules involved in a 1031 Exchange.

http://www.irs.gov/newsroom/article/0,,id=179801,00.html

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Thank you paradise.


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Customer: replied 7 years ago.

By the way im in Texas. So the transaction does not qualify . Then how do i figure out how much i owe in taxes? Then on my new construction project for the new car wash, i can deduct all my start up expenses and construction cost?

Expert:  Merlo replied 7 years ago.
Hello again paradise,

For the convenience store which you sold in May, you would have to determine the gain you had from the sale. This would be done by taking your selling price less your basis. You will also have to recapture any depreciation expense you claimed on the property. Your basis will be whatever you initially paid for the business and any additional capital that was invested during the time you owned it. Your gain would then be taxed as a long term capital gain, and that tax rate is currently capped at 15%.

As far as your new business, all of your construction costs are added to your basis in the property. They cannot be expensed. Once you actively start the business, you will claim depreciation each year of your basis, over a period of 39 years.

If this was helpful please press the Accept button.

Thank you paradise.