1031 tax exchange

I recently sold some investment property. Someone told me if I use the funds to buy a timeshare, I could use a 1031 to reduce the capital gains tax on the sold property. Does anyone know if this can be done? What about if I purchase WM points? Any info would be great.

Got To Exchange For "Like Kind" Property.

Tahoe2006 said:

I recently sold some investment property. Someone told me if I use the funds to buy a timeshare, I could use a 1031 to reduce the capital gains tax on the sold property. Does anyone know if this can be done? What about if I purchase WM points? Any info would be great.

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If you want to exchange your investment property (i.e., property held for the production of income) for a timeshare you plan on using for all the cool reasons folks use timeshares (i.e., going on vacation & having a nice time), then you likely are out of luck for doing a tax-deferred 1031 exchange.

The idea behind tax-deferred like-kind property exchanges is swapping 1 for a different 1 of pretty much the same kind -- which, I suppose, would not rule out swapping for timeshares you plan on renting out for profit but probably would exclude exchanging for timeshares you plan on using yourself.

Consult your tax professional for details, or click here for some IRS guidance on the subject.

-- Alan Cole, McLean (Fairfax County), Virginia, USA.​

As much as it pains me Alan, I would disagree. Like-kind refers to similarity of investment property like equipment for equipment, vehicle for vehicle, real estate for real estate, etc.

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/industries/article/0,,id=98491,00.html

So, unless Dave waltzes in with one of his statutory prohibitions, investment real estate can be exchanged for investment real estate. A rental house for a rental timeshare would be like kind.

Here is a discussion as it applies to second homes:

http://www.1031.us/Docs/Articles/ClassificationofSecondHomes.pdf

Bear in mind that I live in the Ozarks and we just do our taxes any way we damn well please, cuz we know those revenuers get lost in the woods really easy.

Whew! That was a close one.

After actually reading your post, Alan, I see that we do not disagree.

It's just that you somehow read into it that the timeshare would be used personally, rather than rented, and I did not read that.

And after actually reading tahoe's post, which I should have because it is so short, Points does not sound like a very good idea. Unless the process has changed, once you have sold the former property you have 45 days to identify the replacement property, or a selection of what might be the replacement property.

My gut tells me that if you sold something that had a deed, you better replace it with something that has a deed.

No idea how old tahoe is, but let's think down the road. Do you live in the city and want to line up a retirement home? Got an area in mind?

Why not exchange your present investment real estate for a house that would make a nice retirement home? Then, place it with a management company or manage it yourself if it is not too inconvenient. When you are ready, it will be there. Sell your principal residence, put that money in your pocket and convert your investment property to personal use.

Is there a prohibiton to that, say a holding period?

http://apiexchange.com/index_main.php?id=8&idz=50

JLB said:

Is there a prohibiton to that, say a holding period?

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Wow! Real answers, not just hillbilly speculation.

http://apiexchange.com/index_main.php?id=8&idz=62

Looks like Points not deed-based, RTUs and Vacation clubs are out, but deeded timeshares are okey dokey.

Tahoe2006, in addition to other considerations as stated above, if you have already closed your sale, you're too late.

You probably would have had to put that 1031 language into into your sales contract. At closing of your sale, proceeds from the sale would have had to have gone to a third party intermediary, to be held by them until you close on the replacement investment property you are purchasing.

And... the price of the replacement property you are purchasing would have to be equal to or greater than the one you sold.

There is also a short window to identify your replacement property, and then a longer one to purchase - but not that long.

At least that is my understanding/experience.

Here's an informative website:
www.1031exchangetax.com/tdex06-1.htm

Laurie said:

Tahoe2006, in addition to other considerations as stated above, if you have already closed your sale, you're too late.

You probably would have had to put that 1031 language into into your sales contract. At closing of your sale, proceeds from the sale would have had to have gone to a third party intermediary, to be held by them until you close on the replacement investment property you are purchasing.

And... the price of the replacement property you are purchasing would have to be equal to or greater than the one you sold.

There is also a short window to identify your replacement property, and then a longer one to purchase - but not that long.

At least that is my understanding/experience.

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Your understanding is exactly correct. If the sale has already closed and the proceeds did not go into a QI (qualified intermediary) account under some pretty specific documentation, then there is no way to complete a valid 1031 exchange as to that sale. If however the sale has not yet closed, then it is not too late but you will need to get certain things in place prior to closing, and you will need to comply, to the letter, with some very specific requirements after you close, as well (including a 45 day period to identify the replacement property and 180 days to close on its acquisition).

All right.

In a 1031 exchange, you cannot touch the funds. The Qualified Intermediary handles all the $$$, and the 1031 verbiage has to be in all the agreements.

Even after the one we did was complete, and the QA still had some funds, they could not return it to us until the end of the 180 day period because, since we had designated more than one possible replacement property in the 45 day period, there was still the possibility that we may purchase another even after we finished purchasing the one we did.

My take on this subject is that it is something you better do according to the rules, not by Hillbilly Tax Code.

JLB said:

Even after the one we did was complete, and the QA still had some funds, they could not return it to us until the end of the 180 day period because, since we had designated more than one possible replacement property in the 45 day period, there was still the possibility that we may purchase another even after we finished purchasing the one we did.

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How did you have funds left over? I thought the price of the replacement property or properties has to be = or > the sold property, and that all proceeds have to go to the exchange property/ies.

Is this incorrect?

Laurie said:

How did you have funds left over? I thought the price of the replacement property or properties has to be = or > the sold property, and that all proceeds have to go to the exchange property/ies.

Is this incorrect?

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In order to shelter 100% of your capital gain, all net proceeds need to be reinvested in the replacment property, AND the amount of debt on the replacment property needs to equal at least as much as the debt on the property sold. If less than all of the proceeds are invested in the replacement property (ie - there are funds left over), or if there is less debt on the replacement property than on the property sold, then, on a dollar for dollar basis, you will have to recognize capital gain. (Its formally known as the "gain within boot" rule, for those who might be interested). So, bottom line, if there are funds left over, you can get partial, but not full, capital gain deferral.

Does anyone know the cost of the services of a QI? Is it a flat rate or a percentage?


Thanks,
Don

We contributed funds of our own because the purchase price of the replacement property was more than the proceeds of the properties we sold.

When there was money left over, it was part of the money we had contributed, but had to be held for the 6 months any way.

It makes sense.

Laurie said:

How did you have funds left over? I thought the price of the replacement property or properties has to be = or > the sold property, and that all proceeds have to go to the exchange property/ies.

Is this incorrect?

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If no one answers, bump this and I'll dig into the fire safe and let you know what ours was almost ten years ago.

DonM said:

Does anyone know the cost of the services of a QI? Is it a flat rate or a percentage?


Thanks,
Don

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Starker Exchange Web Sites & I.R.S. Forms

DonM said:

Does anyone know the cost of the services of a QI? Is it a flat rate or a percentage?

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Check with these folks, or with 1 of the many others out there in the same business. I don't remember which of'm we used for our various 1031 exchanges over the years. After the dust settles & your old exchange property is gone & your new exchange property is all titled in your name & your rent payments are coming in from the new exchange property & all that, then you can send in 1 of these forms to the friendly folks over at IRS.

It's always something, eh?

-- Alan Cole, McLean (Fairfax County), Virginia, USA.​

DonM said:

Does anyone know the cost of the services of a QI? Is it a flat rate or a percentage?

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Probably a flat fee, and in the hundreds, not thousands of dollars - call a real estate agent in your area, or a tax preparer, or any attorney who handles real estate closings, they'll know who to refer you to.