1031 exchange question
Question: I can’t get the same answer on this, maybe someone here can help?
We have a second property (cabin) that we purchased for $175,000. There is no mortgage, it is free & clear.
We sold it for $370,000 in California. Our net will be about $345,000. We plan on purchasing a home as a rental for $150,000. If we do a 1021 Exchange, how do we calculate the capital gains tax.
We actually do owe $100,000 on it to my mother, but it is unsecured, i.e. the property was deeded to us.
Answer: The answer is quite simple. You sold it. There can be no 1031 exchange now. Even had you not sold the property your description (cabin deeded from your mother) implies the property is a vacation or second home, in which case it is personal use property and therefore not eligible for 1031 exchange treatment. In order to satisfy the IRS rules, you must declare a 1031 before a sale contract is in force, either in a MLS listing or at the very least in the contract itself. But unless the property was a rental, you can’t do an exchange anyway. First, if the sale has already happened, no need to look further — any potential 1031 exchange is blown. For a 1031 to be a possibility, the “sale” has to take place via a qualified intermediary. Once the funds get in your hands, it’s over.
Second, you have to exchange business/rental property for same. If the house you sold was just a 2nd house that wasn’t in business/rental use, you can’t do the exchange — 1031 doesn’t apply to personal property.
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