Time to bail on Real Estate Investment?

[bluehero]

6 Years ago, I purchased 4 acres of property with 1400' of riverfront near the resort community of Sunriver in central Oregon for $50K. Due to the prestegisous nature of the area and a lack of buildable riverfront with that much forntage, the currnet value has risin to $600K. This is an insane compunded annual growth rate and one I find it hard to believe is sustainable. Since a natural disaster like a forest fire could kill the value, I am incliined to pull the plug and sell and divert the money into other investments.

Is there anyway other than a 1031 exchange to avoid/minimize capital gains on the sale?

Thanks,
Bob

[Martha]

No, you are stuck with an exchange. But at least you are taxed at the capital gains rate.

Like-Kind Exchanges - Real Estate Tax Tips


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.

Like-Kind Property

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.

http://www.irs.gov/businesses/small/...=98491,00.html

There are links in the above article to IRS publication 544 which talks about exchanges in more detail.

[tryan]

Last 1031 exchange I did was a duplex for 2 waterfront acres. Inclined to believe the opposite type of exchange (land for bussiness property) would also pass the IRS muster. Even if the swap was to a lavish single family house.

Then rent the "bussiness property" for a year (need to pacify the IRS's "business" requirement); then move in and claim it as your primary residence for 2 years. Then sell tax free. Or stay and sell the old primary residence tax free.

Alot of moving around ... but if you're saving yourself from a 6-figure tax payment ....

[Martha]

Yeah, the dirt for dirt should be fine. So long as it is held for investment/business purposes.

We live in our four unit apartment building and are looking at selling. Lots of recapture of depreciation. We are looking at buying a single family home in an exchange and rent it out "a while". Move in later and save the tax for the time being.

Some day, unless we die first, when the property is sold the tax on the depreciation will have to be paid.

[MJ]

Never thought about a 1031 exchange and am not sure if I would want to do it but could this be applied to 1/2 of the sale of a 2 fam house where 1 apartment was a sched E rental and the other was owner occupied.

[Nords]

Originally Posted by Martha

Some day, unless we die first, when the property is sold* the tax on the depreciation will have to be paid.*

Or make it one heckuva charitable deduction...

[macdaddy]

I would 1031 into another property and then rent it out. As another poster said, if you "moved" into that property, you could sell it with no tax. I say "moved" because you may not even really have to live there or move, just keep it empty for a year (or let a relative live there), which would cost some amount, but less than you would pay in taxes now.

Another idea would be to 1031 into a rental property (a multiplex) and collect the cash flow. With 600k you should be able to pick up a monthly check of ~ 2000 after all expenses, and have a secure investment (and cash flow) that will keep up with inflation. You could eventually place this into a corporate structure and your kids could inherit it over time with no tax penalties.

[tryan]

could this be applied to 1/2 of the sale of a 2 fam house where 1 apartment was a sched E rental* and the other was owner occupied.

yup, no problem .... see the link.

Can I do an exchange if I use my property partially as a residence and partially as a rental property?
Yes. In such an exchange, allocation of value between the two types of property becomes important. For example, if an exchanger owns a three family house occupying one floor as a personal residence, the allocation may be by the respective square footage, the number of units, the quality of interior improvements, or by appraisal. Any reasonable allocation is permissible. The gain attributable to the personal residence may be eligible to be excluded under IRC § 121.

http://www.allstates1031.com/1031-ex...es-faqs.php#41

[NinjaPigeon]

Originally Posted by macdaddy

As another poster said, if you "moved" into that property, you could sell it with no tax. I say "moved" because you may not even really have to live there or move, just keep it empty for a year (or let a relative live there), which would cost some amount, but less than you would pay in taxes now.

I was under the impression that the property had to be owner occupied for the two year tax exclusion rule to apply. Is this incorrect?

[tryan]

Quote from: macdaddy on April 29, 2006, 02:06:01 PM
As another poster said, if you "moved" into that property, you could sell it with no tax. I say "moved" because you may not even really have to live there or move, just keep it empty for a year (or let a relative live there), which would cost some amount, but less than you would pay in taxes now.


I was under the impression that the property had to be owner occupied for the two year tax exclusion rule to apply. Is this incorrect?

Yes, need to live in the unit 2 of the last 5 years to take the primary home tax exemption.

Personally, I would not play games (keep it vacant ...) with the IRS. Stakes are too high. It'll be years later if/when the game is uncovered and they'll be looking for all the taxes and penalties. Need to be able to sleep at night.

Buy something you're comfortable living in and live in it. Then dump it tax free .... slam-dunk.

[Martha]

I agree with tryan (hey, is that a first? ). I would be willing to 1031 into a single family home, but then I would rent it out for a year or two before moving in and converting it into my home. But you need to move in and live in the home for two of five years to later be able to exclude gains under the principal residence rules.

Remember that to the extent you have to take depreciation, you will have to pay tax on the recapture even if you make the property your principal residence at a later date. But at least the tax isn't due until you sell the property.

[Nords]

Originally Posted by Martha

Remember that to the extent you have to take depreciation, you will have to pay tax on the recapture even if you make the property your principal residence at a later date. But at least the tax isn't due until you sell the property.

We're facing that long-long-long-term potential issue with our rental property.

I need to research family LLPs and gifting to see if they avoid depreciation recapture. It's not as if we wanted to depreciate the house in the first place.

[MJ]

Originally Posted by tryan

yup, no problem .... see the link.

http://www.allstates1031.com/1031-ex...es-faqs.php#41

Thanks for the link. I briefly read it and it appears that since I just closed on my house a month ago that it would be too late now.

Am I correct?

[Martha]

MJ, it is too late. You have to set up the exchange before you sell.

You want to be a vagabond anyway.

[Martha]

Originally Posted by Nords

We're facing that long-long-long-term potential issue with our rental property.

I need to research family LLPs and gifting to see if they avoid depreciation recapture. It's not as if we wanted to depreciate the house in the first place.

One thing to look at is contributing your interest in the rental property into an LLC and at a later date, gift interests in the LLC to your daughter. Of course, when she sells she will have a big tax.

[retire@40]

Originally Posted by Martha

One thing to look at is* contributing your interest in the rental property into an LLC and at a later date, gift interests in the LLC to your daughter.* Of course, when she sells she will have a big tax.

Instead of gifting, why not let her inherit the LLC so she gets a stepped-up basis and avoid the tax?

[Nords]

Originally Posted by Martha

One thing to look at is contributing your interest in the rental property into an LLC and at a later date, gift interests in the LLC to your daughter. Of course, when she sells she will have a big tax.

Thanks, I've read that. And taxes will be her problem!

Originally Posted by retire@40

Instead of gifting, why not let her inherit the LLC so she gets a stepped-up basis and avoid the tax?

For "getting-hit-by-a-bus" estate planning, that works well. Otherwise I'm not sure that spouse & I want to be landlords for the rest of our lives, and that rental property would be a concern if we were spending down our assets for long-term care.

I've seen families where the kids grew up learning how to manage the rental properties and then later ended up in them as adult tenants renting from their parents. I think that eventually (decades later) it's better to gift the property than to keep it titled in the names of the aging parents.

[MJ]

Originally Posted by Martha

MJ, it is too late. You have to set up the exchange before you sell.

You want to be a vagabond anyway.

Yeh, you're right. It was just a thought.