Q:

Subject: Exchange Question

 

I’m not a big time investor.  I’ve only paid cash for one property and financed two others.  In order to qualify for one of my townhomes I had to finance it with the idea that it was my second home even though I immediately rented a “room” to a tenant and still maintain access to it.  I want to sell this second home that I have owned for almost a year and put the proceeds into a new construction home that I intend to occupy within 6 months of owning it.  The house I live in now will then become my new investment property that I will rent out.  I have owned my primary residence for 4 years and lived in it the whole time.  I still have the free & clear in Florida which is also rented and this townhome I want to sell is in Arizona.  My new house and current house is in Nevada.  Do I have a chance of a 1031 from the AZ townhome to the NV new home since I will not make that much off the sale only having it for less than a year?  How much in taxes do I stand to pay if I have to? 

A:

The very first thing you need to do is get with your personal professional tax advisor and have him/her calculate the cost basis of your AZ second home, which will need to be adjusted downward for depreciation that you claimed or could have claimed if you didn’t do so.  You should then provide him/her with the expected sales price and selling costs (commissions, etc.) so that the potential gain or loss can be more accurately estimated.

Only then can you get any idea of how much in Federal and State income taxes you will be looking at.  The tax rates you will be subject to will depend on your other income and deductions for the year.  Too many people get all hot and bothered about doing a 1031 exchange before even seeing if there will be any taxable gain to worry about.  You may discover that your potential tax will be only a few thousand dollars, which will make the cost and hassle of a 1031 exchange economically infeasible.

If, on the other hand, you are looking at several thousands of dollars in taxes on the sale, you will have reason to be concerned.  However, as you described your reinvestment plans, you would not qualify for a 1031 exchange because your new property would not be like kind to your old one.  Investment or rental property must be replaced with investment or rental property.  A residence that you are so open about intending to occupy is not either of those kinds of real estate.

Good luck.

Kerry Kerstetter 

 

Q:

Subject: Primary Residence Sales Question?

Hi Kerry ,

 

How are you doing?

 

I have a question about the primary residence.

 

What if somebody live in the house for 2 yrs as primary residence and then rented for 3.5 yrs.

 

I know, he can take the tax exclusion , but he lived in the property in 2 out of 5.5 yrs (instead of 2 out of 5 yrs). Now, can he still take the exclusion?

 

Please reply me back.

 

Thanks,

A:

You may be misunderstanding the rules.  Extending the look-back time window to 5.5 years is not an option.

After you have been out of your home for more than 36 continuous months, it is no longer eligible for any of the Section 121 tax free exclusion as a primary residence.  The home has been converted into a rental, which would require the use of a 1031 exchange in order to avoid taxation.

Depending on how much hassle you want to endure to utilize the Section 121 exclusion, you could always move back in to the home and start adding personal use time in order to accumulate the necessary 24 months total out of the 60 months prior to the sale. 

Your personal tax advisor should be able to assist with this.

Good luck.

Kerry Kerstetter

 

Q:

Subject: sale of personal residence

 

I found your article re Primary Residence sales to be very informative.  I have read several of your articles, and they have helped me a lot.  Especially in the area of 1031 exchanges. 

 

I do, however, have a question that I cannot find an answer to in the research I have done.  Perhaps you can help, and probably know the answer off the top of your head. 

 

Can you sell your personal residence and retain a life estate in the property and still qualify for the $250,000/$500,000 exclusion?  I don’t know any Arkansas state law but in Mississippi with a life estate you are no longer the legal owner of the property, but you still have the use of the property for the rest of you life.  Any help you can give me here will be greatly appreciated. 

 

Thank you very much!

A:

My first impulse was that I thought I had recalled that the sale had to be for the entire interest in the property; but I checked my reference sources and discovered that’s not the case.

Here’s the pertinent section from IRS Pub 523, which you can see online here.

“Sale of remainder interest.   Subject to the other rules in this publication, you can choose to exclude gain from the sale of a remainder interest in your home. If you make this choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately.”

Since the sellers in your scenario are retaining the use of the property for the rest of their lives, a buyer would be purchasing a remainder interest that would give him/her complete control over the property only after the sellers pass away or relinquish their life estate.  As the IRS info says, if the latter happens and the sellers later decide to move on and sell their life estate to the original buyer, that would not be eligible for the tax free exclusion.

Retaining a life estate does add a lot of complications with the valuation of gifts and charitable donations; but seems to be much less complicated in relation to home sales.

I hope this helps.  Thanks for writing and helping me clear up this issue in my own mind.

Kerry Kerstetter

Follow-Up:

Thank you very much!

 

 

Q:

Subject: Exchange Question

If a Section 1031 exchange is set up, but cancelled when one of the partners cashes out, are there any IRS penalties?

Thanks.

A:

If an exchange falls apart before being finalized, the disposal will be reclassified as a fully taxable sale, which would generally result in high taxes and possible late payment penalties.  There is no separate penalty on the failed exchange itself.

Kerry Kerstetter

 

Q:

Subject: Exchange Question

 

My brother and I own a house as investment property together.  We purchased it for $60,000.00 about 5 years ago.  We are now thinking about selling it for $160,000.00 and replacing it with a house or condominium in the $100,000.00 to $140,000.00 price range.  Do we have to pay any capital gain tax in this transaction?  My accountant told me that we would have to pay capital gain tax on the $40,000.00 we use to pay off the mortgage unless we replace the property with property for $160,000.00 or more.  Is this true? Thank you for your advice.

A:

That’s not exactly right.

Basically, to have a completely tax deferred exchange, you need to acquire new property or properties that cost at least as much as the net selling price of your old one.  The net selling price would be the gross price less the selling costs.  I call that the target replacement price.

Whatever you under-reinvest, or miss the target replacement price by, will generally be subject to taxation.  In your example, assuming you have no selling costs, a $100,000 replacement property would put you $60,000 short of your target.  This would mean $60,000 would be taxable; not just $40,000.

Another twist to consider.  The gain that will be subject to tax will be the most expensive portion, which is normally the depreciation recapture.

If you don’t want to pay taxes on the $60,000, you and your brother may want to consider acquiring one or more additional properties as part of this 1031 exchange costing at least $60,000.

This is a relatively simplistic way to look at it.  There are a few more twists in terms of the cash in and out, as well as the amount of debts on both the old and new properties that will affect the exact amount of taxable gain; but the concept is fairly straight forward and I hope clear to you.

As you hopefully know, you must use the services of a neutral third party exchange facilitator to prepare the proper documents and hold the cash proceeds.  You can’t just sell your old property and take the money to reinvest on your own.  You can see all of the rules for properly handling a 1031 exchange at www.tfec.com 

Good luck.

Kerry Kerstetter

 

Q-1:

Subject: HELP Please!  Re: Reverse 1031 Exchange

 

Hi, I must open this by saying I am very embarrassed to ask this as I have an MBA and really should not have let myself get into this predicament.  Here is the situation – perhaps you can offer some sound advice.

 

My father passed away in 1988 leaving his only heirs – myself, my younger sister and my developmentally disabled brother his very modest home (he did not have a will). 2 years later, I moved another disabled man in with my brother and they became involved in an Independent Living Program that offered life-skill assistance (and supplemented their “rent” – which basically covered expenses – property taxes, utilities and upkeep.)  The 2 men lived in the home until 2005. In late 2004, I took out a home equity loan on this home (#1) to purchase a new home (#2) for them (for $270K) in order to move them closer to my sister and myself.  House #1 was on the market for several months (unoccupied) and finally sold 5 months later for ($402K) — it is located across the street from the bay at the New Jersey shore and the land is suddenly quite valuable.  The dilapidated home itself was leveled by the new owners to build a new house on the lot. I went to settlement to sell House #1 with my sister (with a Power of Attorney for my brother who is mentally 6 years old).  We signed papers for about 4 hours – while the buyers read every word and signed 3 or 4 different sets of mortgage papers and their infant cried the entire time.  When it was all over, it was almost 3:00 pm and my 9-yr-old son was due to get home from school and would be home alone.  The Title Company handed me a check for the FULL AMOUNT of the sale of the house (less closing costs) — I grabbed it and ran out to get my son.  When I got home, I called the mortgage company that held the home equity loan (on home #1) asking to whom I needed to send the check to pay off the loan.  They said I needed to go to the bank and get a cashier’s check to pay it off and send it to them.  They were confused as to why the Title Co. did not see them as holding a Lien on the property.  All the while, I had no idea that I should have been doing a 1031 Reverse Exchange on these two properties to avoid the payment of capital gains taxes.

 

What can I do now?  I paid the Home Equity Loan off as well as another Equity loan that we had on home #1 – (to pay for siding and windows, a new bathroom and carpeting the year before.)  There is no money left over and I certainly do not want to pay gains on $402K.  Please advise if you can – I am really freaked out after doing some research on the Internet about this and realizing that I did not do this properly. My family (sister and brother) rely on and trust me to handle everything and I hate to think that I have totally screwed up.  Is this something that can be rectified after the fact??? 

 

I appreciate any help you can offer!  I was actually considering calling the IRS to set up an appointment to talk to them about this.  Then, I saw your site.  Thank you very much,

A-1:

You do have a messy situation here.  Asking the IRS for advice would be a crazy thing to do.  You need to remember that their job is to make you pay more taxes.  They do not want to help you lower them.  You need to work with a professional tax advisor who can thoroughly analyze all of the many factors involved here for you and all of the property’s co-owners.

Doing a 1031 exchange on the old house is not possible. You have received the money; so it is now a sale and cannot be converted into a tax deferred  exchange, regardless of what happens to the money.

Some of the issues that need to be analyzed and evaluated with your personal professional tax advisor will include the following.

What was the cost basis of the old home?  Normally, inherited property is given a stepped up costs basis to its fair market value as of the date of your father’s passing.  Any capital improvements made since then can be added to the cost basis.

Whose names were on the title of the old home?  If you brother’s name was on it, his share of the profit could possibly be excluded since it was his primary residence.  These rues are explained on my website.

How was the old home being reported on each of the owners’ income tax returns?  Has anyone been claiming depreciation on it?  If so, that has reduced the cost basis and increased the taxable gain.

Good luck.

Kerry Kerstetter

Q-2:

Dear Kerry: 

 

Thank you so much for taking the time to consider and answer my question.  I realize that calling the IRS would be insane.  I have made a call to an accountant and left a message for him to call me when he gets in. I am going to discuss this with him in detail as you suggested.  I did consider that my brother may not have to pay any gains on his share as it was his primary residence and he is entitled to up to $250K in profit from the sale of his home. Is that right?  I am going to go to the link to your site you mentioned and read it carefully.  (But does it matter that the new home is in just my sister and my name?  We decided that although it is for him to live in until he dies, it was just too difficult to get his name on it and stuff due to his limitations. In other words, does the money he gets from the sale of his primary residence HAVE to go into the purchase of a new primary res.?) My sister and I did alternately claim the rental income and therefore did depreciate it – as you mentioned. However, we also did put quite a bit of capital improvements into the house and have every receipt for the entire 17 years. I really do not know how to figure out the cost basis of the old house though. We did not have it appraised in 1988 and the property taxes were probably based on it’s worth being about $100K. (I wasn’t about to question that at the time.) Perhaps insurance records showing what we insured it for (for replacement value???) — but that probably was not too much either. Trying to figure out fair market value for a property 17 years ago may be a bit tough.  Perhaps there were sales in the area that I can research. As I said, the house has been demolished so it may be hard to prove that it was worth more or less than houses in the area.

 

I wish I had contacted you before we did all of this (or someone who is an expert in this) — hopefully, the accountant I have contacted will have some kind of creative thoughts on the best way to do this without losing our shirts. If you come up with any alternative thoughts, please pass them along!  I have only tried to do what is best for my handicapped brother and I feel like we are going to get screwed royally by the IRS.  Not to mention, my sister will probably never talk to me again if I hit her up with a large tax bill due to my stupidity!

Thanks again,

A-2:

If you read the info on home sales, you will note that requirement to reinvest into a new home was repealed in May 1997; so it makes no difference whether your brother ever buys a new home in his own name.

I am confused on your cost basis issue.  If you have been claiming depreciation, you must have already set up your cost basis of the home on your depreciation schedules, which have been attached to your 1040s.  You will probably be stuck with that figure; but your personal professional tax advisor will be able to see if that’s the case.

Good luck.

Kerry Kerstetter

Q-3:

Dear Kerry – I met with my accountant yesterday and you were correct — the fact that my brother was one of the owners and resided there for more than 2 years (17, actually) allows him to declare the $250K w/o having to purchase another primary residence.  Also, the depreciation (about $43,000 over the 17 years) will come off of the original cost basis.  But, I have found some like-properties from the local tax office from 1988 and have 5 comps to the house we sold that bring the total to just about $250K  (Fair Market Value in 1988, less depreciation, plus capital improvements over 17 years, which I have ALL receipts for) — therefore, my Accountant will file a return for my brother claiming the sale of the property and we should be ok. (He did say keep everything for 3 years just in case it comes back to haunt us.) He also agreed with you in that trying to do a Reverse 1033 now is a huge mistake and will only raise BIG red flags with the IRS.

 

This is all so good to know as my husband and I are in the process of selling an investment property in Fla. and buying a condo instead.  All of this info will come in very handy next month when we settle — better late than never, huh?  Once again, thank you for your time and advice.  I will stay tuned to your site – it is very informative.

 

As a quick aside — my husband jokes with me that even though I have an MBA (graduated with full honors too!), I am educated way beyond my intelligence — or so he says.  This whole mess may just prove him to be right!

 

Have a great day! 

Oops – I meant 1031 not 1033, see what I mean?

A-3:

I’m glad to see that you’ve found competent professional tax help.

The one piece of your puzzle that still confuses me is how you were able to claim depreciation for all of these years without establishing your inherited cost basis on the first 1040 where you showed it as rental property.  If you are now going to change that figure, your tax preparer will need to attach an explanation to the 1040 as to why you have been using the wrong cost basis for so many years.

Taxes are a very specialized and complicated area.  Having an MBA or even a CPA doesn’t make anyone an expert.  There is no substitute for real life experience working on tax returns and with their related issues, including audits.

Good luck.

Kerry

 

Q:

Subject: Exchange Question

My father-in-law owns highly appreciated raw land in Florida which he bought many years ago for $8,000.  He is receiving sale solicitations in the neighborhood of $400,000.  He wants out because he is tired of paying the increasing real estate taxes.

 The Q is: Can he use the 1031 rules to buy fraction shares in both my home and my brother in laws home (reduction in our mortgages) – with the understanding that we would pay him on the note (a monthly dollar amount equal to the non-deductible equivalent of principal and interest amounts – using a 25 year amortization). 

He would conceivably be placed on the deed and would leave us the share of the home in his will if he were to die before the 25 years was up.  He is 80 years old today (in good health)???

Basically we would be paying him 5.00% instead of paying the bank.

Thanks in advance for any help.

A:

There are several complicated twists to the scenario you are proposing, which all parties concerned need to discuss in detail with qualified professional tax advisors.

Your father in law could reinvest into your homes as long he will be acquiring equity ownership interests in them and he will be treating them on his books as investment, business or rental property.  He cannot treat them as personal usage. 

For this to work, you and your brother-in-law would have to report the sales of the partial interests on your 1040s, which may or may not be taxable to you.  There is also a restriction on 1031s between related parties if the replacement properties (your homes) are disposed of within two years, except for extraordinary circumstances (such as death or illness).  

Your FIL would also have to comply with all of the rules for 1031s.  The amount reinvested would have to be equal to or higher than the net sales price ($400,000 less selling costs) and there would need to be proper documentation of all legs of the exchange.  The handling if the cash proceeds would have to be set up so that he doesn’t have access to it.

However, the way you are proposing structuring the deal sounds more like he would be investing his money into the mortgages as a lien-holder instead of an actual equity owner.  Such an arrangement would not qualify as a like-kind replacement for his old property.  A lien-holder interest is not the same as an equity ownership.  Your repayment plan makes it even less likely to fly because you would be treating him as a lien-holder by paying him interest and not as a co-owner.

One possible way around this would be for you and your BIL to rent your FIL’s share of the homes from him and pay him monthly rent, which he would report on Schedule E of his 1040.  That would properly document the replacement properties as rental, which qualifies a like-kind for his Florida investment property.  This would also give him some monthly cash income to live on.

How your FIL wants to distribute his shares of the homes after his passing is completely up to him and doesn’t really affect this possible transaction.

These are just some of the details that all of you need to discuss in much more detail with qualified professional tax advisors.

Good luck.

Kerry Kerstetter

 Follow-Up:

Kerry,

 

Thank you for such a thoughtful response.  Is this the type of work that you could (better yet, would be willing to) do for us if we decide that this is the way to go?

Based upon your response – I think I would sell him my house and pay him rent (I qualify to exclude the gain on my 1040) – my house has an appraised value of in excess of his land purchase.

Best,

My Reply:

My wife, Sherry, has her own company, Tax Free Exchange Corporation, that handles 1031 exchanges all over the USA.

You can learn more about her services, as well as her fees, on her website.

Good luck.

Kerry Kerstetter

 

Note:  This is the email exchange to which I referred in my item on the Tax Gap and how people intentionally overpay their taxes rather than risk IRS hassle.

Q-1:

Subject: Property sale

Dear Mr. Kerstetter,

I had written to you once about a year ago regarding the sale of primary residence with under 2 years occupancy.  You said that it sounded like I had a good case if I chose to sell my house under 2 years.

I am in the Marines and was transferred to Yuma, Arizona in February 2004.  I signed a contract to build a house in December 2003 which was completed 15 August of 2004.  When I purchased this 4BD/2BA 1768 sq ft home, it was with in mind that only my domestic partner of 2.5 years and myself would be residing there full time with occasional visitations from our children.  We each have a son and daughter from previous marriages for a total of 4 children. 

After moving to Yuma, Arizona in February of 2004 my son came to live with me at the demand of his mother in March 2004.  In June 2004 both of my domestic partners kids came to live with us full time and we moved into the house on 15 August 2004.  A custody battle arose over my son and daughter in August of 2004 due to the mother wanting my son back and both kids wanting to live with me due to an unstable and hostile home at their Mother’s.   I was granted temporary custody of my son at that time until the custody hearing was completed. 

With 3 children living with us full time now and my daughter coming for visitations it quickly became apparent the house was going to be crowded with all 4 children living there, only 1 bathroom between them, and my son needing his own room now that he was a teenager. 

In February of 2005 (This was about the time in which I e-mailed you before.) I signed another contract to build a house 5BD/2.5BA 2261 sq ft. to be completed in December 2005.  The final hearing was in May of 2005 and I was granted custody of both children beginning June 2005. 

I sold the old home 23 November 2005 and closed on the new house on 9 December 2005.  (I resided in the house I sold for 15+ months.)

I bought the first house for $147,000, owed $130,000, and sold it for $269,900.  Gross gains = $122,900.  I left the money with the title company until closing on the new house.

I bought the new house for $265,000.   I at first was going to finance $130,000 and put all the proceeds from the 1st house into the new house, but thought best to finance another $20,000 for possible capital gains tax.  $115,000 from the old house rolled right into the new house at the title company I never touched it and I received a little over $20,000 back from the title company due to financing more to cover taxes just in case.

I received a 1099 from the Title company for gross amount of $269,900.

My question is; does this still sound like a good case for a pro-rated exemption under “unforeseeable circumstances”?  Should I request a private letter ruling or am I just wasting my time and money? (Apparently there is fee of $200 or ?more? to do a request.)

I have consulted the military base tax center, done exhausted reading online, and even called the IRS 1 (800) number and am even more confused than I was before.  I appreciate any help or guidance that you can provide.

Thank you,

Sincerely,

A-1:

It still sounds as if you would qualify for the pro-rated exclusion, which any properly experienced tax professional should be able to confirm.

It’s not necessary to get prior approval from IRS.  Just attach a statement of the facts to your 1040.

The residence sale rules don’t have any restriction on use of the cash or requirement to reinvest anything.  That’s only required for 1031 exchanges of business and investment properties.

The fact that you did buy a larger house to accommodate the unexpectedly larger family should be included in your explanation of why you qualify for the pro-rated exclusion.

Good luck.

Kerry Kerstetter

Q-2:

Thank You for responding to my letter Mr. Kerstetter.

I was close to just surrendering and paying the capital gains tax to avoid having to pay any penalties or fees.

I just have one more question if you have the time to respond.

If the IRS finds that I do not qualify for a pro-rated exclusion and it’s after the 15th of April or even 2 years later will I have penalties or be fined more money?

Thanks again,

Sincerely,

A-2:

In the extremely unlikely (perhaps one in a thousand) chance that IRS questions your eligibility to use the pro-rated tax free exclusion, it’s not an automatic requirement to pay the additional taxes.  You and your representative will have plenty of opportunity to present more information to convince them that you are correct.  Worst case scenario, if you are unable to convince them and don’t want to drag it on, you would have to pay the extra Federal and Arizona taxes and interest on those taxes.  Penalties are negotiable, and it shouldn’t be hard to have them waived in a situation like yours.

 If, on the other hand, you choose to not take any chances and pay those taxes with your original returns, there is absolutely zero chance that IRS will come back and tell you that you didn’t need to.  It is also the case that if you pay the taxes and then later change your mind, it will be practically impossible to get that money back.  IRS will use your  original self assessment of tax as an admission that you owe it, and it will be a hundred times more difficult to change that after the fact.  It’s the same as a murderer trying to recant a confession.

Your case is a perfect example of why I have long contended that, contrary to popular opinion that everybody is a tax cheater, more people intentionally or accidentally overpay their taxes than underpay.  Millions of people are just like you, looking for 100% assurance that their position is sound and will not ever be questioned by IRS.

As I have said for decades, tax law is at most 10% black and 10% white, with the other 80% as gray as can be.  My position has always been that things falling into the gray area should be interpreted in favor of the taxpayer.  Unfortunately most other tax preparers and taxpayers themselves prefer to interpret the gray areas in favor of the IRS in the hope that this will buy them some safety from attacks. I have many cases over my career where people have still been attacked by IRS, even though they intentionally overpaid their taxes by several thousands of dollars; so that scenario isn’t a guarantee of safety. 

It’s obviously your choice which way to treat this.  I hope I’ve given you some food for thought before you send in your 1040.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Exchange Question

I’m selling a property for a more expensive one. I’m thinking about doing a 1031, a friend of mine told me I wont have to pay taxes on it if I deferr the income as personal income over a 5 year period. Reason being I lost my job because of a accident and can’t work so I have no income except for the money from this property I’m selling, part of the money will be used to buy the new property/ Can this be done or is he wrong? Should I go ahead and do the 1031? also on the new land Im buying I will be building a house to live in for two years then I’ll built another on the same property and do the same again…….Thank You

A:

You really need to be working with a tax pro who can go over all of the options you have.  There are several issues involved here.

The next best thing to a 1031 exchange is an installment sale, where you receive the sale price over multiple years and then report a pro-rated portion of the gain on your tax return. 

You can do a combination of a 1031 exchange and installment sale; but this usually results in 100 percent of the installment note principal payments being taxable in the year received.

In regard to reinvesting 1031 proceeds into a property that you intend to use as a primary personal residence, that is not allowed.  The replacement property has to be used for business or investment purposes.

You weren’t really clear on the type of property you are selling.  In case it is your primary residence, Section 1031 doesn’t apply.  There are entirely different rules, which you can see explained here.

Any competent tax pro should be able to help you with exactly what your situation is.

Good luck.

Kerry Kerstetter

 

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.