PHILADELPHIA - If you've decided to do a 1031 exchange, there are a few things that you should know. First, the exchange must be conducted through a qualified intermediary. This person is responsible for conducting the exchange on your behalf and avoiding the pitfalls. This intermediary should also have connections with the best 1031 exchange companies in all 50 states.
Identify like-kind property in a 1031 exchange
The first step to completing a 1031 exchange on your primary residence is to identify like-kind property. The identification must be in writing and signed by the taxpayer. It should include the address, legal description, and type of replacement property. The identification should be sent via mail, fax, or e-mail and must be received by the new owner no later than 45 days after the exchange.
To determine if the property you're selling qualifies as like-kind property, look at the property's sales history. Generally, if it was sold to renters or was leased out to tenants, the property would qualify as like-kind. However, if the property was used only for personal purposes, it would not qualify as like-kind.
The replacement property must be similar in type and value to the property you are selling. The regulations describe four examples of properties that are like-kind: one-acre land and two-acre unimproved land. The taxpayer then acquires 1.5 acres of land and a barn, with the two-acres remaining empty.
Before engaging in a 1031 exchange on your primary dwelling, you should speak to a tax professional or CPA. They can advise you on the legalities and regulations. It is important to note that there are several states' rules relating to the exchange. The most important thing to remember is to identify the property's use history, its equity, and any mortgage or other obligations. It is also important to understand how escrow works, and whether or not multiple properties can be exchanged.
Section 121 exclusion from 1031 exchange for primary residence
Using a 1031 exchange to sell a primary residence can qualify a person for a Section 121 exclusion. However, the replacement property must be owned for at least two years before the taxpayer can use the property as a primary residence. The property must also be used for business purposes.
If you are planning to sell your home in a 1031 exchange, the tax benefits of Section 121 are significant. This tax break is available for up to three-fifths of the gain from the sale of your home. The only exception to this rule is if you use the property as your primary residence.
You may also be able to combine the tax benefits of a 1031 exchange and the Section 121 exclusion for a primary residence by selling it as your primary residence. In order to qualify, your home must have been used as your primary residence for two of the previous five years.
Another benefit of the Section 121 exclusion is the ability to allocate the proceeds from the sale of a primary residence to your new purchase. If you're an active real estate investor, this tax advantage can be extremely beneficial for your business. Besides saving on taxes, it also provides a tax shelter for your capital gains. For example, if you sold a rental property prior to 2009, you can convert it into a primary residence with the Section 121 exclusion. Moreover, you won't need to insert any new cash into the replacement property.
Identifying like-kind property in a building-to-suit exchange
When identifying like-kind property in a building to-suit exchange on your primary residence, it's important to consider the nature of the property. Not all property has the same property rights, such as a freehold interest in the land or a leasehold interest in the improvements. As a result, there are several situations in which like-kind property cannot be exchanged on the same property. In general, real property that is held for investment purposes is not like-kind to personal property. Similarly, a freehold interest property with no improvements is not like-kind to a property that is subject to a leasehold interest or a ground lease, unless it has more than 30 years left on the lease.
Like-kind property is property that is of similar value and type to the property you're giving up. It can be farmland, another residential rental property, or undeveloped land. The replacement property does not need to be in the same state or jurisdiction as the property you're giving up.
In order to qualify, a replacement property must be "unambiguously described" or "identifiably described". This means that it must have a name or address that's distinguishable from your primary residence. It can also be a For Sale By Owner property or off-market property. It is important to identify the replacement property so that it can be accurately valued.