1031 Tax Defer - noob needs help

[Reef]

My mom owns an apartment which we used to live in for 5 years. It is recently being rented out for the last 4 years. The renters left in the last month and now it is empty. She wanted to "give" me the apartment. What I want to do is sell the apartment, use a 1031 to defer the tax, and buy a bigger house. I've done a little research on 1031's, but am basically a noob when it comes to buying/selling houses.




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Q - What are the requirements for a valid exchange?

* Qualifying Property - blah blah blah

* Proper Purpose - Both the relinquished property and replacement property must be held for productive use in a trade or business or for investment. Property acquired for immediate resale will not qualify. The taxpayer's personal residence will not qualify.

* Like Kind - Replacement property acquired in an exchange must be "like-kind" to the property being relinquished. All qualifying real property located in the United States is like-kind.

* Exchange Requirement - The relinquished property must be exchanged for other property, rather than sold for cash and using the proceeds to buy the replacement property.


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Basically, I'm not sure of the process in ultimately going from Apartment (in mom's name) to house (in my name). Any input / advice / suggested reading / who I should talk to / etc is greatly appreciated

thanks

[punkass]

Two part:

1) her gift to you. She'll be on the hook for a gift come estate tax time. Not an issue if she isn't rich, but might come into play if she has assets near $2M.

2) 1031 exchange - To qualify for a 1031, you need to sell the apartment and buy another piece of real estate of equal or greater value for the same purpose. It seems she had the apartment for income/investment purposes, so your new piece of property will need this purpose as well.

But this doesn't really apply to you. (I hope someone else will confirm this...) 1031 exchanges are used to defer tax implication from selling a piece of property. You won't have this problem because once you receive the gift, your cost basis will be bumped up to when you received it. Thus, if you sell it relatively soon, you won't have that much of a gain, if at all. No need for an exchange.

I hope I'm right here. I'm not an expert at all in this field of economics.

[Reef]

Was also thinking.. could I either:

a) have her sell it to me where I only take over payment on whats left of the mortgage

or

b) have her sell it to me outright for $X (anywhere from $1 to thousands) ?

[thing85]

If she sells it to you for significantly less than its fair market value, like for a few dollars or some other nominal amount, I believe this is a form of tax evasion since it's a transfer between related parties. In this case, should the IRS catch it (it would probably raise a red flag anyway) they would impose a FMV that they calculate and make your mom pay tax on that amount + interest + penalties. I could be wrong about this, but I believe they would do something like that.

As for gifting, assume that this property would sell at a gain, your cost basis in the property would be exactly the same as your mom's. The basis doesn't get bumped up in this case. So if she would have a gain of $X and she gifts it to you and you turn around and sell it, you would have exactly the same gain as she would have had (assuming the price of the property is held constant).

punkass, you are correct about the 1031 exchange. If she gifts you real estate that was used for investment purposes, you must "exchange" it for another piece of real estate used for investment or business purpose.

As for the exchange requirement, the property must either be directly exchanged for a new property (as in, you don't sell it first then buy something else) OR the new property must be identified within 45 days of the date the old property was sold (meaning, you have to have a purchase "in the works" so to speak) and the new property must be owned by you within 180 days of the date the old property was sold.

Hopefully that helps some.

[joda mas]

I am doing a 1031 exchange right now. You will hire an exchange company who will charge a small fee, they will make sure you don't get any cash from the sale, ie., the cash from the sale stays in an account and is used to buy the exchange property. Like the other guy said, identify 3 properties w/in 45 days of sale, complete the purchase within 180 days of sale.

if you buy a house to live in, that would not considered a like-kind exchange (like the other poster said). however, if you rent the house for a while, then later decide to use it as primary residence, you're off the hook.

not sure how long you should rent as intent is what matters here. say you initially bought the house as a rental, then your plans changed after 6 months or whatever, so you convert to your primary residence. after 2 years of primary residence you can sell the house with a tax free gain, up to max allowed, i think 250k for single person.

[rocketplayer]

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I am doing a 1031 exchange right now. You will hire an exchange company who will charge a small fee, they will make sure you don't get any cash from the sale, ie., the cash from the sale stays in an account and is used to buy the exchange property. Like the other guy said, identify 3 properties w/in 45 days of sale, complete the purchase within 180 days of sale.

if you buy a house to live in, that would not considered a like-kind exchange (like the other poster said). however, if you rent the house for a while, then later decide to use it as primary residence, you're off the hook.

not sure how long you should rent as intent is what matters here. say you initially bought the house as a rental, then your plans changed after 6 months or whatever, so you convert to your primary residence. after 2 years of primary residence you can sell the house with a tax free gain, up to max allowed, i think 250k for single person.

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6 months will not fly as a holding period for the rental received in the exchange. There is not a set time period but any decent tax advisor tells you to hold for a minimum of 1 calendar year at least as a rental.

Your mom will also need to file gift tax returns when she gifts you the property. Depending on the state, gift tax may be due and she will need to use up some of her federal lifetime gift exclusion.

Your basis in the property will be the original cost plus improvements your mother paid less any depreciation taken over the years. With capital gains rates as low as they are now you might consider just selling and pay the tax.

If not, in all likelihood down the road if you do have a taxable sale on this or a property received in an exchange, you will likely pay increased tax as I feel capital gains rates will increase after the next presidential election.

Also beware who you use as an exchange company. When I hear the words, nominal fee, I get concerned about the company. I have seen many people make the mistake over the years of shopping for the lowest fee in exchange companies and regretting it later.

[thing85]

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Your basis in the property will be the original cost plus improvements your mother paid less any depreciation taken over the years.

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Or more simply, it's your mother's basis. The basis carries over.

[rocketplayer]

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Your basis in the property will be the original cost plus improvements your mother paid less any depreciation taken over the years.

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Or more simply, it's your mother's basis. The basis carries over.

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The poster says he is a noob, doubtful he even understand what basis fully entails which is why it was explained in detail.