Q:

Subject: Exchange Question

 

we would like to sell a second home and buy another second with the equity earned.  would we qualify for a tax-free exchange? 

 

thank you.

 

A:

Check out this post from almost a year ago:

Kerry Kerstetter

Follow-Up:

Kerry,

Thank you and your reply is helpful.  We usually spend only a couple weeks there a year and have made dramatic improvements over seven years.  During that time the property has tripled in value.  From your answer of last year, it seems we would be okay.  Please let us know if you disagree.

Thanks again for your help.

Reply:

If that’s all the time you visit the property each year, you could make the case that it is time doing maintenance to protect your investment and not having a personal pleasure vacation.

As we always need to keep in mind, the burden of proving the case in tax matters lies with you.  You should do everything possible to document the investment intent and usage of the properties (old and replacement) so that you will have no fear of any IRS challenge in the extremely rare chance that they ask about it.

One thing you can do to better document the property as investment is to describe the interest and property taxes on your Schedule A as being for “Investment Property” and not for a personal or second residence.  You should do that on any tax return that you haven’t yet filed.

Having qualified the property as being eligible for a 1031 exchange, all of those rules would apply.  This means that you need to reinvest the entire proceeds into new property, not just your equity.  As is explained on the Tax Free Exchange Corporation website, your target replacement price for a completely tax deferred exchange is the selling price of the old property less the direct selling costs.  Mortgages that are paid off as part of the disposal leg are considered part of the proceeds and will require you to either take on an equal or higher mortgage on the new property or use your own cash to make up the difference.  Any amount by which you miss the target replacement price will be taxable gain.   

Good luck.  I hope this helps.  You should work with your own personal tax advisor to calculate your potential taxes on the property sale in order to properly weigh the advantage of doing a 1031 exchange.

Kerry Kerstetter

 

Q:

Kerry,

What final tax documents must be given to Exchanger at the end of the exchange?  What tax documents must be given to the other party to the exchange?

 

I want to know the tax documents the accommodator gives to the exchanger and the Seller (if any).  I do know tax documents have to be given to the exchanger; but I am not sure which documents eg:  8824   must be sent.  I want to make up a tax package for the client but am unsure which tax document I must send.

Thanks for your help.

A:

In regard to the exchange accommodation services, there are no official IRS tax forms that need to be provided to any of the parties involved in the exchange.

If you are also handling the closing as the escrow agent, you do need to prepare the 1099-S with the gross selling price to be sent to IRS and to the seller.

The 8824 is completed by the exchanger’s tax preparer from the settlement statements from all of the exchange legs, disposal and replacement. 

I hope this is what you needed.

Kerry Kerstetter