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Lev
Lev, Tax Advisor
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I have an investment property we bought in VA in 2002 for 444,000.00

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I have an investment property we bought in VA in 2002 for 444,000.00 we lived in it for 5 years and have rented it for the past 5 years. we just bought another house in VA, for 437,000.00, which closed on 20 April 2012. We want to sell the investment property. Can we use the 1031 exchange? thanks.
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

Hi and welcome to Just Answer!

Because your original property was rental property - you definitely may use section 1031 "like-kind" exchange and defer your gain - if you will use another house as your rental (not personal) property if sale proceeds will be fully used to pay for that another house.

 

Generally, if you exchange business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized under Internal Revenue Code Section 1031. If, as part of the exchange, you also receive other (not like-kind) property or money, gain is recognized to the extent of the other property and money received, but a loss is not recognized.

Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.

Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties. Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.

To qualify for a section 1031 exchange the original property should be exchanged for other property, rather than sold for cash and using the proceeds to buy a new. Generally, a section 1031 exchange is facilitated by third party Qualified Intermediary, who holds proceeds while a new property is purchased.

 

Let me know if you need any help.

 

Some references:
Form 8824, Like-Kind Exchanges - http://www.irs.gov/pub/irs-pdf/f8824.pdf
IRS publication 544, Sales and Other Dispositions of Assets - www.irs.gov/pub/irs-pdf/p544.pdf
US code - http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001031----000-.html

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22776
Experience: Taxes, Immigration, Labor Relations
Lev and 5 other Tax Specialists are ready to help you
Customer: replied 2 years ago.
thanks for your help. the other house will NOT be a rental property, it will be our primary residence, so from what you wrote, we cannot use the 1031 exchange. cheers.
Expert:  Lev replied 2 years ago.

That is correct - personal properties - not business or investment properties - are not eligible fro section 1031 exchange.

Sorry if you expected differently.

Customer: replied 2 years ago.
thanks. ok, what info would you need to calculate my tax obligation if I sold below rental prop?
Expert:  Lev replied 2 years ago.

Following would be needed...

-- selling price

-- selling expenses (Realtor fees, etc

-- basis - purchase price, purchase expenses, improvements, etc

-- depreciation (allowed or allowable) for the time the property was rented.

 

The form 4797 - http://www.irs.gov/pub/irs-pdf/f4797.pdf - is to report the disposition of business property - rental property in your situation.

To calculate your gain or loss - you will use an adjusted basis. As long as that was rental property - and it is depreciated - if you have a gain - the depreciation must be recaptured - up to the amount of gain - and added to your taxable income.

If you have a loss - it is fully deductible - and will be transferred to form 1040 line 14 as a negative amount.

Let me know if you need any help.

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