U.S. Tax Court Determines Investment Property can be Converted to Primary Residence
A recent tax case is one that addresses questions we frequently receive from investors that are having difficulty renting their newly acquired replacement property. The case summary below was provided by the Federation of Exchange Accommodators (FEA). Following the summary, we will provide an overview of why we feel this is such an important case.
Reesink vs. C.I.R., T.C. Memo 2012-118
In Reesink vs. C.I.R., T.C. Memo 2012-118, No. 2475-10 (April 23, 2012), the U.S. Tax Court considered whether a single-family house was acquired by the taxpayers as a personal residence or as an investment.
In 2005, the taxpayers sold a 50% Tenant-in-Common interest in a San Francisco apartment building for the gross sales price of $700,000, and they exchanged, using the net proceeds except for some intentional boot, acquiring a single-family house and a vacant lot in Guerneville, CA. The taxpayers' mortgage loan application indicated that the property was purchased as an investment. "For Rent" signs were posted on the property. Flyers were distributed throughout Guerneville advertising the property for rent. Two prospective tenants examined the property to consider leasing it, but each decided that they could not afford the asking price of $3,000 per month. The taxpayers never lowered their asking price. The property was never advertised for rent in any local newspaper. The court did not say if the property was ever listed for rent with a real estate broker, although the taxpayers consulted with one.
After failing to rent the Guerneville property for some time, Mr. Reesink wanted sell the parties' San Francisco home because they could not afford the carrying costs of all the real estate that they owned. Mrs. Reesink resisted this idea because she liked living in San Francisco and because she did not want to take their son out of his current high school. Nevertheless, the parties listed their home in San Francisco in April, 2006, about six months after they acquired the Guerneville property. At that time, the Reesinks considered either moving to Guerneville or moving in with Mr. Reesink's sister. Two months later, when their San Francisco home was sold, they elected to move to Guerneville. That was almost eight months after they acquired the Guerneville property. Until they moved in, they had never stayed in the Guerneville property or used it for any personal purpose.
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Avoid the Boot when Selling your Property
When selling a relinquished property, everyone is relieved to finally get to the closing assuming all of the details have already been taken care of and it is smooth sailing from here. Unfortunately, there are a few potential tax traps lurking on the settlement statement that can eat into your 1031 exchange tax deferral.
Security Deposits and Prepaid Rents
Security deposits and prepaid rent credits are not a routine closing expense and can create a taxable event when paid from the Exchanger to the Buyer using sale proceeds. To avoid a tax liability, the Exchanger can bring his own funds to the closing table to cover these expenses and they can be shown on the closing statement as Paid Outside Closing (P.O.C.).
Non-Transactional Expenses
Some Exchangers ask the closing agent to pay expenses from the sale proceeds that are not routine transactional expenses, such as the last electric bill, invoice for recent repairs and even credit card bills. Payment of these expenses will create a taxable event for the Exchanger and we encourage our Exchangers to exclude these expenses from the closing statement.
Escrows for Repairs/Outstanding Issues
If funds must be held in escrow for repairs or outstanding issues, there are several things that must be considered. The escrow agreement should state that any funds released from escrow should be paid directly to 1031 CORP. and not the Exchanger. This will preserve the Exchanger's ability to use these funds for their replacement property and avoid capital gains on them. If the escrow is for an expense, such as back taxes or an outstanding lien, and will take quite a while to disburse or will disburse after the replacement property is acquired, ideally the Exchanger should put up the money from his own pocket to be held in escrow to prevent creating a taxable event.
Our Exchange Officers strive to review closing statements in advance of closing to look for potential tax traps, such as these, and bring them to your attention. Our goal is to help you maximize your tax deferral while keeping the exchange process simple for you.
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Trending this Month...
Exchanging Property with No Gain
Investors are exchanging properties with little or no gain, maybe even selling at a loss, to avoid costly depreciation recapture. The exchange is allowing them to capitalize on the buying opportunities and acquire a better investment.
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1031 Seminars
Join us at our next complimentary seminar to learn more about 1031 exchanges and their many benefits. You must register in advance. Refreshments will be provided.
1031 EXCHANGES MADE EASY
Wednesday, June13th, 6:30 - 8:30 pm
1031 CORP., 100 Springhouse Drive, Suite 203, Collegeville, PA
REGISTER NOW by emailing RSVP@1031CORP.com with your contact information! To schedule a 1031 seminar or sales workshop for your group, please call Margo McDonnell, CES® at 1.800.828.1031 ext. 212 or send her an email at margo@1031CORP.com.
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Lunch & Learn Webinars 
Join us for one of our complimentary Lunch & Learn Webinar Series webinars designed to provide quick educational sessions to help you build and preserve wealth. Grab your lunch and log on to a computer near you!
1031 Exchanges Made Easy
Thursday, June 7th, 12:00 - 12:45 pm EST
This webinar will provide an overview of 1031 tax-deferred exchanges and their many benefits. We'll also review the requirements of a successful exchange. Register Now!
Tax Consequences of Selling your Primary Residence or Vacation Home
Tuesday, June 19th, 12:00 - 12:45 pm EST
This webinar will review the exclusion allowed on the sale of a primary residence under section 121. We will also discuss the sale of vacation homes and when they may qualify for a 1031 tax-deferred exchange. Register Now! |
Message from our President
 | | Margo McDonnell |
Dear Friends,
It is hard to believe the school year is almost over already (although I am looking forward to a break from the kids' homework!). While most classes are wind down, we have actually seen an increase in the number of requests for seminars and continuing education classes on section 1031 and related topics. The increase in real estate sales is once again leading to more 1031 exchange transactions and many investors and their professional advisors want to learn more or get a quick refresher. There are a few ways we can help you.
Custom Seminars and CE Classes:
These can be tailored to the needs of your group. We can present these for investor groups, professional trade associations, professional offices, Chambers of Commerce and various clubs (Lions, Rotary, etc.) to name a few.
1031 Exchanges Made Easy Seminar:
Since 1996, this seminar has been held monthly in the evening for the convenience of our clients. This seminar is held in our Collegeville headquarters but can also be scheduled at your location.
Webinars:
If you or your client is considering a 1031 exchange and you would like to learn more about their benefits and how they work, I encourage you to attend our 1031 Exchanges Made Easy webinars held the at 12:00 pm ET on the first Thursday of every month. With the ability to log on anywhere and in just 45 minutes, we'll provide a great overview of 1031 exchanges. It is also a great refresher! We also regularly schedule a variety of other webinars on 1031 exchanges and related issues.
If you would like to schedule a seminar or webinar for your group, please contact me and I'd be happy to get something scheduled for you.
Wishing everyone a wonderful Memorial Day weekend and sending many thanks to the brave men and women of our armed forces!
Best regards,
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About 1031 CORP.
Serving as a nationwide qualified intermediary for 1031 tax-deferred exchanges since 1991, 1031 CORP. strives to provide a superior exchange experience for our customers and their advisors. We provide our customers with enhanced security of funds, knowledgeable exchange professionals and a commitment to keep the exchange process simple for our customers and their advisors. Every member of the exchange team is a Certified Exchange Specialist® and has the experience and expertise to facilitate even the most complex exchange transaction, including reverse, improvement and personal property exchanges. Additional information can be found at www.1031CORP.com.
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Margo McDonnell, CES®
Certified Exchange Specialist®
President
1.800.828.1031 ext. 212
Mobile: 610.680.6896
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Sue Umstead, CES®
Certified Exchange Specialist®
Senior Vice President
1.800.828.1031 ext. 208
Mobile: 610.755.8520
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Marissa LoCascio, CES®
Certified Exchange Specialist®
Senior Exchange Officer
1.800.828.1031 ext. 210
Mobile: 610.742.4351
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Richard Heller, Esq., CCIM, CES®
Consultant
1.800.734.1031
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Bettye J. Matthews, CPA
Consultant
1.800.680.1031
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Joseph F. Szajnecki, CES®
Consultant
1.800.734.1031 |
Margo McDonnell, CES® has been selected to present two continuing education courses at Triple Play 2012, the annual conference for the PA, NJ and NY State Associations of REALTORS®.
Her courses include:
- Capital Gain Misconceptions & Their Unexpected Tax Bills
- 1031 Exchanges: What's Trending Now and Anticipated Tomorrow
Triple Play 2012 will be held in Atlantic City from December 4th - 6th.
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