Back in the day (pre-2006), the rage for investment condo/property owners

was to sell and buy new investment property using a 1031 exchange. For our company back then, the bulk of our transactions were sales or purchases on Sanibel, Captiva and Fort Myers Beach.   Those days are creeping back as investors are using 1031 to defer big taxes. The Island real estate market continues to be steady and produce tremendous returns for investors.

Dave Owens, CPA, CES

 

Let me share a unique 1031 exchange we did on Sanibel and Captiva Islands.   A couple from the Midwest sold a rental condo at South Seas in 2006, performed a 1031 exchange, and purchased a rental house on Sanibel. After 7 years, they decided that the rental house was more work than they wanted. They sold the rental house recently and are purchasing a rental condo on Sanibel. The first sale in 2006 would have had approximately a $50,000 capital gain due, but because it was part of a 1031 exchange, no tax was paid. Using 1031 again on the second sale has saved the couple another $40,000. All cash proceeds were rolled to the next property and both properties were rented year round.  The $90,000 savings is now allowed to grow with investment.

 

With a 1031 exchange, you will sell your investment property (typically a rental condo or house) and purchase a new investment property without paying any federal or state taxes as long as you follow the rules.   The rules are not hard to follow, and the process can be a very smooth one. First and probably most importantly, you must exchange business or investment property. A second home with no rental history cannot be exchanged. Vacation properties can be exchanged as long the current and future property meet certain guidelines.  

 

Another important rule states that you must use a Qualified Intermediary (QI) to help facilitate your exchange. This "QI" must be an independent third party, and not a professional that you currently do business with (ie. your RealtorŪ, attorney, CPA). Another rule outlines that in order to avoid all tax, you must buy equal to or up in value. In addition, within 45 days after you sell your relinquished property, you must identify your intended replacement property(s) and with 180 days of closing on the sale, you must close on all intended purchases.

 

As previously mentioned, the IRS issued regulations specifically for vacation rentals (Revenue Procedure 2008-16). These regulations are more stringent, but if the properties are held long term (at least 2 years minimum) there can be opportunities for owners to still have use of the property during the year.

 

As I mentioned before, a 1031 exchange can be very seamless. A little planning before the exchange can help lay the ground work to make sure that the 1031 tax code is followed accordingly during the sale and purchase transactions. We have a new an updated 1031 guide on our website that can be downloaded for free. This guide give you detailed information on how the exchange process works. Please feel free to call us any time for free consultation about you specific transaction.

   

One of my favorite things about the start of a New Year is all the fun "Best Ofs" that come out to recap the previous year.  And My friend Pam's

 

   

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