Q:

Subject: 1031 Like Kind Exchange

Hi,

A quick question for you if you have time about a 1031 Like Kind Exchange.

 

In 2002 I sold a resort in South Texas with a $300K profit, $120K went to our residence (not taxed) and the remainder was rolled over with a 1031 when we bought a resort in Eureka Springs. Sold that resort last Aug. with a $190K profit also showing $120K as residence. I bought another type of business, sales, no resort or lodging and I am now being told that I am looking at anywhere from a $10K to $100K tax bill this year since I did not roll that money over to the same type of business. The new business I bought was $262,500.00 and all that money came from the sale of my last business, I rolled all my money over into my new business and am being told that I now have to pay taxes on both resorts profit. Is this so, all my profit went right into another business!

 

Friends from Eureka told me about you, happy to see that you are my neighbor, are you taking new clients and can you help me keep my money?!?!?!?!?!?

 

Kind Regards, 🙂

A:

Two issues in your email don’t look good.

A 1031 exchange is technically called a “Like-Kind Exchange.”  The old and new assets have to be the same kind.  The most common is real estate for real estate, which sounds like what you had in 2002.  If you then disposed of real estate in Eureka and reinvested into other kinds of business assets, you can’t have a valid like-kind exchange and the real property sale is fully taxable.

The other issue is how the reinvestment was handled.  If you took the money from the Eureka Springs sale and used it yourself to buy new business assets, a 1031 exchange is not possible, even if you had purchased like kind real estate.  One of the rules of 1031 exchanges is that you cannot touch the money.  You either have to have it go directly from the first property to the replacement one, or you have to have a third party exchange facilitator hold it on your behalf.  Your email doesn’t mention an exchange facilitator.

You can see the rules for how 1031 exchanges should be handled at www.tfec.com

It sounds as if you didn’t get good advice before the disposal of your Eureka property; so you are probably going to have a big taxable gain to contend with.  If you didn’t seek out any advice before selling the Eureka property, you have just learned an expensive lesson.

The possible good news is that the new business assets you purchased may qualify for the Section 179 expensing election, which was up to $105,000 for 2005.  Your personal tax advisor should be able to help you in this regard.

As it says below, we are not accepting any new CPA clients.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for your time and information Mr. Kerstetter.