1031 Exchange FAQ - ASSET

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Common 1031 Exchange Questions

What assets qualify for 1031 Exchange?

Is it possible to 1031 Exchange my personal residence for a business-related property?

What kind of liability is treated as boot in a 1031 Exchange?

Are you sure in a 1031 Exchange that land zoned for Farming can be traded for land zoned Residential?

In a 1031 Exchange, do I have to close sale on ALL of my identified replacement properties?

What assets qualify for 1031 Exchange?

For 1031 Exchange the real estate you own is considered an asset that must be thoroughly vetted in order to determine if it qualifies for 1031 Exchange. Since we are dealing with IRS matters, you should know that there are 4 classifications of real estate of which only 2 qualify for 1031 Exchange. Your personal residence and the property you purchased for a "quick flip" does not qualify for 1031 Exchange. Your vacant land and your rental home does qualify for 1031 Exchange.

Related Info: qualify, assets, estate, real, purchased, residence, quick


Can a trust holding a property do a 1031 exchange? There are 3 beneficiaries. Can there be 3 separate properties after the exchange?

Trusts can do a 1031 Exchange, we do them all of the time, but like LLC's and LTD's, they have to be executed as a single entity. If the goal is to purchase 3 separate properties for the 3 beneficiaries, we recommend selling the property as a single trust, purchasing the 3 properties as a single trust, then dissolving the trust and splitting the properties/assets among the beneficiaries.

A trust cannot separate the properties among the individuals.

For further information, please review this with your attorney or CPA.

Related Info: properties, beneficiaries, holding, single, among, properties/assets, dissolving


I want to 1031 Exchange a building that I intend to demolish. Can I write off the demolition costs?

Sometimes in a 1031 exchange, the exchanger acquires land and buildings with the intent of tearing down the buildings to make way for new construction. This type of exchange qualifies for exchange treatment if the Replacement Property is held for use in a trade or business (such as rental property) or is held for investment. But taxpayer, be wary, there is a sinister double tax trap when the demolition tax rules apply.

The Internal Revenue Code bars deduction of the cost of demolition or any loss sustained on account of the demolition. And you are denied a write-off for the adjusted basis of the depreciable assets being demolished. Both the cost of demolition and the adjusted basis of the depreciable assets must be capitalized and added to the basis of the land where the demolition structures are located.

Here’s an example of how this works: You exchange a commercial property you have owned and operated as a rental for several years. You exchange for a large older residential rental complex located on ten acres of land. You intend to tear down the existing structures and build a new rental residential apartment complex.

Under the substituted basis rules of Section 1031, you figure the basis of your Replacement Property to be $2,300,000 with $1,100,000 allocated to the basis of the existing buildings. Your cost of demolition is $200,000. Under the demolition rules, you are required to add $1,100,000 – adjusted basis of the buildings – and the demolition costs of $200,000 to the basis of the land. You are not permitted to write-off as an expense the adjusted basis of the depreciable buildings or the cost of demolition.

Comment: The tax-writing mystics who conjured up this provision have magically reincarnated your demolished depreciable buildings as nondepreciable land, proving once again there is life and taxes in the great hereafter.

Related Info: costs, demolition, demolish, intend, building, basis, buildings, land, rental, cost


I inherited some land from my parents, can I 1031 exchange it into something else?

One of nicest things about what you describe is that you can almost ALWAYS 1031 Exchange a parcel of land. As a capital asset, land is almost always considered Investment Real Estate because it is held for the purpose of appreciation in value, either over the passage of time or location.

Even if purchased with the idea you might someday develop the property, if you don't develop it (for any reason), the property will not lose its classification as investment property. Also, unlike Real Estate held for business use, such as a rental home, Land can be 1031 exchanged again and again with no time ownership requirements.

Related Info: something, parents, land, inherited, real, estate, develop, investment, time


You talk a lot about 1031 exchange of real estate. Can I 1031 other property?

Yes. If you have property held for productive use in a trade or business, or for investment purposes, it may qualify for 1031 Exchange treatment under the IRS Section 1031. Lots of 1031 exchanges involve "multi-assets", which include real property and personal property. Discuss this with your CPA or attorney and see how it applies in your particular case.

Related Info: estate, real, personal, include, multi-assets, discuss, attorney


How do I figure out real estate interest for 1031 exchange?

Here is a “nutshell” approach to figuring out how each kind of real estate interest (excepting your personal residence) is classified for tax purposes and how each is treated on the tax return.

There are three major classifications of interest on the Federal individual income tax return. Each classification is subject to different rules. Because of this, great care must be given to determine the correct classification of each interest item. It’s the only way to figure what is deductible and where to deduct it.

1. Business interest

(a) Interest on rental income real estate
(b) Interest on business indebtedness

2. Investment interest

3. Personal interest

(a) Consumer interest
(b) Qualified residence interest.

Borrower's Cost of Getting Loan
Borrowers may incur substantial fees and charges when a mortgage loan is funded. These costs include legal fees, "points", appraisal fees, escrow fees, service charges, surveys, real estate commissions and title costs. These financing costs must be analyzed and divided into two categories:

1. Costs that do not qualify as interest.
2. Costs that do qualify as interest.

Costs That Do Not Qualify As Interest
Costs that do not qualify as interest are treated as lending service costs. If the mortgage was obtained to acquire real estate used in business or held for profit, the costs are deductible by amortizing them over the life of the loan. If the mortgage was obtained to acquire real estate held for personal use, lending service costs are not deductible.

Amortization of loan costs is always taken using the straight-line method. Amortization is continued until all costs are written-off or the loan is paid off or assumed. If there is a balance in the unamortized loan costs account, and the loan is paid off or assumed, the tax treatment of the balance depends on the classification of the property. In cases of rental income and other business property, the balance is deductible as an operating expense of the property.

For example, 10 years ago you bought an apartment house and paid loan costs of $20,000 to acquire the 25-year mortgage loan. You now sell the property as part of a 1031 exchange. During the last ten years you deducted your loan costs by amortizing them at the rate of $800 per year ($20,000/25 years). Your deduction totaled $8,000 for the ten years ($800 per year times 10 years). The unamortized balance of $12,000 is deductible at the time of the sale as an operating expense of the property. Do not take it as a selling expense of the property - if you do, you could lose the entire deduction.

Costs That Do Qualify as Interest
Costs that qualify as interest are treated as prepaid interest - capitalized and amortized straight-line over the life of the loan.

The term "points" is used to describe the interest charges you pay as a borrower to a lender when you take out a mortgage. Lenders have different names for points: loan origination fees, premium charges, etc. But what they call them doesn't matter. If the payment for any of these charges or points is for the use of money, it is interest.

Charges or points paid for the use of money are deductible as mortgage interest. They are treated as prepaid interest and subject to the prepaid interest rules. Amortization of points is figured using the straight-line method and is continued until the points are all written-off or the loan is paid off or assumed. For example, if you are charged $2,000 interest points for a 20-year loan, the $2,000 is considered prepaid interest. Under the prepaid interest rules, you must spread your interest deduction over the tax years in which it belongs. In other words, you can only deduct in each year the interest expense for that year. $2,000 prepaid interest for a 20-year loan must be deducted over 20 years at the rate of $100 per year.

If there is a balance in the unamortized points account, and the loan is paid off or assumed, the tax treatment of the balance depends on the classification of the property. For rental income and other business, the balance is deductible as an operating expense of the property. For your personal residence, the balance is deductible as qualified residence interest, if otherwise qualified.

An easy to determine what kind of interest you are dealing with is this simple rule:
Interest deductions follow the money. Just ask this question for each interest amount - where did the money I'm paying interest on go? That's where the deduction goes. For example, you borrow money to buy a computer for your business. The interest is business interest - that's where the borrowed money went. Here’s another familiar example. You borrow a hard-money second nd on one of your rental properties and use the money to buy a new personal automobile.

Is the interest deductible? If yes, where do you deduct it? If not, why not?
Just ask the question -where did the money go? Since the money was used to buy a personal asset, the interest is not deductible. Wait a minute, you say. I borrowed the money on my rental property. Why can’t I deduct it against my rental property as an operating expense on Schedule E? The collateral has nothing to do with the use of the money you borrow so don't let it get in your way. The test is: Where did the money go?


Loan proceeds used to acquire:. ->Interest is deducted as:
Rental Property......................................->Rental Expense
Investment Property.............................->Investment Interest
Personal residence..................................->Itemized deduction (if qualified)
Farm property........................................>Farm expense
Dealer property......................................>Business Expense

Related Info: interest, estate, real, figure, loan, costs, money, deductible, expense


I want to 1031 Exchange a building that I intend to demolish. Can I write off

Jim Maxwell on Demolition Losses

Sometimes in a real estate exchange, the exchanger acquires land and buildings with the intent of tearing down the buildings to make way for new construction. This type of exchange qualifies for exchange treatment if the Replacement Property is held for use in a trade or business (such as rental property) or is held for investment. But taxpayer, be wary, there is a sinister double tax trap when the demolition tax rules apply.

The Internal Revenue Code bars deduction of the cost of demolition or any loss sustained on account of the demolition. And you are denied a write-off for the adjusted basis of the depreciable assets being demolished. Both the cost of demolition and the adjusted basis of the depreciable assets must be capitalized and added to the basis of the land where the demolition structures are located.

Here’s an example of how this works: You exchange a commercial property you have owned and operated as a rental for several years. You exchange for a large older residential rental complex located on ten acres of land. You intend to tear down the existing structures and build a new rental residential apartment complex.

Under the substituted basis rules of Section 1031, you figure the basis of your Replacement Property to be $2,300,000 with $1,100,000 allocated to the basis of the existing buildings. Your cost of demolition is $200,000. Under the demolition rules, you are required to add $1,100,000 – adjusted basis of the buildings – and the demolition costs of $200,000 to the basis of the land. You are not permitted to write-off as an expense the adjusted basis of the depreciable buildings or the cost of demolition.

Comment: The tax-writing mystics who conjured up this provision have magically reincarnated your demolished depreciable buildings as nondepreciable land, proving once again there is life and taxes in the great hereafter.

Related Info: demolish, intend, building, demolition, basis, buildings, land, rental, adjusted


I heard I can 1031 Exchange personal property. What is that?

The property used in business can be used in a 1031 Exchange. But they must be of the same class. The nonrecognition rules of 1031 Exchange do not apply to an exchange of one kind or class of personal property for personal property of a different kind or class. However, there’s an important exception to the personal property rules related to deferred exchanges of real estate. It’s explained in Chapter Five. The exception defines incidental personal property transferred with real property in a §1031 exchange.

Depreciable tangible personal property may be either “like-kind” or “like class” to qualify for nonrecognition treatment. Personal property of a like class is considered to be of a “like-kind.” Like-class properties are depreciable tangible personal properties within the same General asset Class or Product Class.

General asset Classes describe the types of property frequently used in many businesses. They include:

Office furniture, fixtures, and equipment,
Information systems (computers and peripheral equipment),
Data handling equipment (except computers),
Airplanes (airframes and engines), planes used in commercial or contract carrying of passengers or freight, and all helicopters (airframes and engines),
Automobiles, and taxis,
Buses,
Light general purpose trucks,
Heavy general purpose trucks,
Railroad cars and locomotives (except those owned by railroad transportation companies),
Tractor units for use over the road,
Trailers and trailer-mounted containers,
Vessels, barges, tugs, and similar water-transportation equipment (except those used in marine construction), and
Industrial steam and electric generation or distribution systems.

Product classes include property listed in a 4-digit product class (except any ending in “9”, a miscellaneous category) in Division D of the Standard Industrial Classification codes of the Executive Office of the President, Office of Management and Budget, Standard Industrial Classification Manual (1987) (SIC Manual).

Copies of the SIC Manual may be obtained from the National Technical Information Service, an agency of the U.S. Department of Commerce.

Here are two examples taken from Reg 1.1031(a)-2 Additional Rules for Exchange of Personal Property [xx] :

You transfer a personal computer used in your business for a printer to be used in your business. The properties exchanged are within the same General asset Class and are therefore of like class.
Henry transfers a grader to Ron in exchange for a scraper. Both are used in a business. Neither property is within any of the General asset Classes. Both properties, however, are within the same Product Class and are therefore of like-kind.

Related Info: personal, class, general, product, equipment, business


How do I 1031 Exchange a rental home for a business?

1031 Exchange involves the exchange of like-kind business property for the purpose of deferring capital gains tax. Emphasis must be placed in that statement regarding physical property or real estate. Since a business is neither property nor real estate, is would be very difficult to convince the IRS that this is a valid 1031 Exchange. If you were going to use the proceeds from your rental home to purchase the real estate assets of a business your chances of conducting a 1031 Exchange would be more successful.

Related Info: business, home, rental, estate, real, proceeds, going


Is the 1031 Exchange property I'm buying impacted by the depreciation of the property I'm selling?

Depreciation taken or method used on the relinquished property does not carry over to the replacement property in a 1031 Exchange. You figure the substituted basis of the replacement property, allocate the basis between land and depreciable assets and start over following current depreciation rules for the types of depreciable assets you acquire. Your CPA can explain this to you more fully.

Related Info: selling, depreciation, impacted, buying, basis, replacement, assets, depreciable, over


Are 1031 Exchange property I'm buying impacted by the depreciation of the property I'm selling?

Depreciation taken or method used on the relinquished property does not carry over to the replacement property in a 1031 Exchange. You figure the substituted basis of the replacement property, allocate the basis between land and depreciable assets and start over following current depreciation rules for the types of depreciable assets you acquire. These types of que

Related Info: selling, depreciation, impacted, buying, basis, depreciable, assets, replacement, types


Can I add my wife to the title of a property I am purchasing in a 1031 Exchange?

Yes, you can!

One of the biggest problems presented with structuring a 1031 exchange is the issue of title. Almost all exchanges require the exchanger to take title to the Replacement Property in the mode the exchanger held title on the Relinquished Property. What that means is the same entity commencing the exchange must be the same entity receiving the Replacement Property and concluding the exchange. For example, if an you the Relinquished Property, then you must own the Replacement Property too (however, see exception below for marrieds); ABC Corporation relinquishes and ABC Corporation acquires; XYZ Partnership relinquishes and XYZ Partnership acquires.

Anytime the vesting title is different in the Relinquished Property and the Replacement Property, you should consult your attorney before entering into the exchange agreement. For example, if an individual taxpayer owns the stock in a C Corporation, and the Corporation owns the Relinquished Property in an exchange and the Replacement Property is taken in the name of the individual taxpayer, §1031 exchange treatment is denied. In fact, the taxpayer has a severe problem of being charged with a distribution from the Corporation, which could be classified as dividend income with no deduction allowed to the Corporation.

There are some special exceptions.

For marrieds. One of the most important applies to individuals who are married to each other. In a 1031 exchange, spouses can be added or not added to transfers of title interests without jeopardy. For example, The Relinquished Property is held in the name of John Smith who is married to Sue Smith. Sue’s name is not on title. They take title to the Replacement Property in both names. Or, the other way around.

Other Exceptions:

If the exchanger dies after the exchange is commenced but before it’s completed, the exchanger’s estate may complete the exchange.
There is a special rule that permits an individual who holds title to the Relinquished Property to relinquish that property in exchange for Replacement Property vested in the name of a single-member, single-asset LLC.

Related Info: purchasing, title, wife, replacement, relinquished, corporation, name, individual


I have a note secured with real estate, can I 1031 Exchange this for another property?

Real Estate notes  are always excluded from 1031 Exchange treatment and will not qualify.

Sometimes you have property you want to sell yet some of the items do not qualify for 1031 treatment.

A transfer of that property in an exchange transaction will be treated as a sale of that property.

Section 1031 excludes these assets from nontaxable treatment:

Property you hold for personal use such as your primary residence.
Stock in trade and property held primarily for sale such as inventories and real estate held by dealers.
Stocks, bonds, notes, or other securities or evidences of indebtedness such as accounts receivable.
Partnership interests.
Notes
Choses in action.
Certificates of trust or beneficial interest


Related Info: estate, real, secured, notes, treatment, qualify, sale


Can I 1031 Exchange furniture in my business for furniture from another business?

A 1031 exchange of assets of a business for the assets of a similar business cannot be treated as exchange of one property for another property. An analysis of each asset involved in the exchange determines if you are engaged in a like-kind exchange for some or all of the assets.

The IRS issued AdvRevRul 89-121 to clarify an older ruling (Rev Rul 85-135) dealing with the transfer of multiple properties in a §1031 exchange. The advance ruling limits the application of §1031 provisions in an exchange of several assets of one business for a single asset of another.

Remember, a 1031 Exchange must be for real property such as land or a rental home. Strict asse

Related Info: business, furniture, assets, asset, ruling, application, provisions


I want to 1031 Exchange a land lot I just bought. My friend thinks it's dealer property. Is that true?

Excellent question and worthy of review! Most land is considered property that is held for investment and almost always passes the 1031 Exchange qualification test with the IRS. Does this land also have a house on it that you are living in? This could create a mixed classification scenario, check out our page on mixed 1031 exchange classifications at http://www.realtyexchangers.com/1031_Exchange_Information_Center/Topic_2_-_Qualified_Property.php#Mixed Classifications.

Perhaps a complete explanation of Dealer property is in order.

To be classified as dealer property, the property must be held at the time of sale or exchange as:

primarily for sale
to customers
in the ordinary course of business.

All three elements must exist at the time of sale or exchange or the property will not be classified dealer property. Primarily for sale means of the first importance. It does not have to constitute more than 50% of the purpose—it need only be the most important. The Supreme Court said, “If an owner acquires a property for rental or investment use, but also plans to sell the property and realize gain in any way he can if the original plan becomes unfeasible, he does not hold the property primarily for sale.”

All buyers of real estate are customers as the term is used here. The activity “in the ordinary course of business” must be directly related to the sale of that property. In addition, the activity must be “busy”. The two “busy” activities usually related to a sale or exchange are

sales activities related to the property, and physical improvements to the property.

Many people, including many IRS agents, misunderstand this activity. To be classified dealer property, there must exist a busy business activity directly related to that property. If you buy a parcel of land, subdivide it, and build houses for sale, there's no question you have dealer property. But if you buy a parcel of land, make no physical improvements, subdivide it by getting it rezoned and meeting other legal requirements, and sell it in the form of an unsolicited offer—you get capital gain treatment. The reason? No business activity related to the property.

If the property is listed with a licensed real estate broker, the sales activities of the real estate broker are not considered to be the sales activities of the owner.

The Tax Court has held the real estate activities of corporations owned or controlled by an individual cannot be attributed to him even though he may be engaged full-time as an officer of the corporation.

Licensed real estate brokers and salespersons ordinarily are not dealers. In Scheuber v. Com. 371 F2nd 996, it was held properties purchased by a licensed real estate broker (who intended ultimately to sell) and held for realization of appreciation in value over a substantial period of time were capital assets.

If dealer property is sold at a gain, the gain is taxed as ordinary income. If dealer property is sold at a loss, the loss is deductible as an ordinary loss.

Related Info: dealer, friend, bought, land, sale, estate, real, related, activities


How do we 1031 Exchange our vacation home?

Vacation homes or your second home are tricky when it comes to 1031 Exchange. If they are not held as a rental they are classified as real estate held for personal use which does not qualify for 1031 Exchange. However, under the rules of §280, a dwelling unit held for both personal use and rental purposes must take a use test each tax year to determine its tax classification for that tax year:

The property is treated as real estate held primarily for personal use and treated as an asset not held for profit if the owner's personal use is more than 14 days or 10% of the total rental days, and the unit is rented for one day or more during the tax year. Does not qualify for §1031 treatment.

The property is treated as rental property if the owner's personal use is no more than 14 days or 10% of the rental days during the tax year and the property is rented more than 14 days during the tax year. May qualify for §1031 treatment.

Related Info: home, vacation, rental, personal, qualify, treated, estate, real


What qualifies as Real Estate held for investment?

Real Estate held for investment is one of the 4 classifications of Real Estate that the IRS has said qualifies for 1031 Exchange. Typically, this almost always land. Investment real estate is a capital asset (IRC Section 1221). It's property held primarily for appreciation of value due to location, passage of time and other factors outside the activities of the owner. It is treated as a portfolio investment asset. Even if purchased with the idea you might someday develop the property, if you don't develop it (for any reason), the property will not lose its classification as investment property.

Related Info: investment, estate, real, qualifies, develop, asset, owner


Can I 1031 exchange property held for personal use for property held for productive use? Why not?

In a 1031 Exchange, property held for personal use can not be exchange for property held of productive use because personal use property is not considered like-kind with productive use property. In a property exchange, you must exchange like for like. Here is an excerpt from our 1031 Exchange Knowledge base:

The nonrecognition rules of §1031 do not apply to an exchange of one kind or class of personal property for personal property of a different kind or class. However, there’s an important exception to the personal property rules related to deferred exchanges of real estate. It’s explained in Chapter Five. The exception defines incidental personal property transferred with real property in a §1031 exchange.

Depreciable tangible personal property may be either “like-kind” or “like class” to qualify for nonrecognition treatment. Personal property of a like class is considered to be of a “like-kind.” Like-class properties are depreciable tangible personal properties within the same General asset Class or Product Class.

General asset Classes describe the types of property frequently used in many businesses. They include:

Office furniture, fixtures, and equipment,
Information systems (computers and peripheral equipment),
Data handling equipment (except computers),
Airplanes (airframes and engines), planes used in commercial or contract carrying of passengers or freight, and all helicopters (airframes and engines),
Automobiles, and taxis, Buses,
Light general purpose trucks,
Heavy general purpose trucks,
Railroad cars and locomotives (except those owned by railroad transportation companies),
Tractor units for use over the road,
Trailers and trailer-mounted containers,
Vessels, barges, tugs, and similar water-transportation equipment (except those used in marine construction), and
Industrial steam and electric generation or distribution systems.

Product classes include property listed in a 4-digit product class (except any ending in “9”, a miscellaneous category) in Division D of the Standard Industrial Classification codes of the Executive Office of the President, Office of Management and Budget, Standard Industrial Classification Manual (1987) (SIC Manual).

Copies of the SIC Manual may be obtained from the National Technical Information Service, an agency of the U.S. Department of Commerce.

Here are two examples taken from Reg 1.1031(a)-2 Additional Rules for Exchange of Personal Property [xx] :

You transfer a personal computer used in your business for a printer to be used in your business. The properties exchanged are within the same General asset Class and are therefore of like class.

Henry transfers a grader to Ron in exchange for a scraper. Both are used in a business. Neither property is within any of the General asset Classes. Both properties, however, are within the same Product Class and are therefore of like-kind."

Related Info: productive, personal, class, general, asset, product, properties


What information is requested on Form 8824 for 1031 Exchange?

The following information is requested on IRS Form 8824 for IRS 1031 Exchange. We recommend that you review this with your CPA or tax advisor.
Information on the Like-Kind Exchange


Description of like-kind property given up:
Description of like-kind property received:
Date like-kind property given up was originally acquired (month, day, year)  . . . . . . 3  MM/DD/YYYY
Date you actually transferred your property to other party (month, day, year)   . . . . . 4  MM/DD/YYYY
Date like-kind property you received was identified by written notice to another party (month, day, year). See instructions for 45-day written identification requirement  . . . . . . . 5  MM/DD/YYYY
Date you actually received the like-kind property from other party (month, day, year). See instructions 6  MM/DD/YYYY
Was the exchange of the property given up or received made with a related party, either directly or indirectly (such as through an intermediary)? See instructions. If “Yes,” complete Part II. If “No,” go to Part III  . . . Yes NoPart II Related Party Exchange Information

Name of related party Relationship to you Related party’s identifying number Address (no., street, and apt., room, or suite no., city or town, state, and ZIP code)
During this tax year (and before the date that is 2 years after the last transfer of property that was part of the exchange), did the related party sell or dispose of any part of the like-kind property received from you (or an intermediary) in the exchange or transfer property into the exchange, directly or indirectly (such as through an intermediary), that became your replacement property? . . . . . . . . . . . . . . Yes No
During this tax year (and before the date that is 2 years after the last transfer of property that was part of the exchange), did you sell or dispose of any part of the like-kind property you received?  . . . . . . Yes No
If both lines 9 and 10 are “No” and this is the year of the exchange, go to Part III. If both lines 9 and 10 are “No” and this is not the year of the exchange, stop here. If either line 9 or line 10 is “Yes,” complete Part III and report on this year’s tax return the deferred gain or (loss) from line 24 unless one of the exceptions on line 11 applies.
If one of the exceptions below applies to the disposition, check the applicable box:
a The disposition was after the death of either of the related parties.
b The disposition was an involuntary conversion, and the threat of conversion occurred after the exchange.
c You can establish to the satisfaction of the IRS that neither the exchange nor the disposition had tax avoidance as one of its principal purposes. If this box is checked, attach an explanation (see instructions).
For Paperwork Reduction Act Notice, see page 4 of the instructions.

Part III Realized Gain or (Loss), Recognized Gain, and Basis of Like-Kind Property Received

Caution: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not like-kind) property, see Reporting of multi-asset exchanges in the instructions.
Note: Complete lines 12 through 14 only if you gave up property that was not like-kind. Otherwise, go to line 15.
Fair market value (FMV) of other property given up  . . . . . 12
Adjusted basis of other property given up  . . . . . . . . 13
Gain or (loss)  recognized on other property given up. Subtract line 13 from line 12. Report  the gain or (loss) in the same manner as if the exchange had been a sale  . . . . . . . . . 14
Caution: If the property given up was used previously or partly as a home, see Property used as home in the instructions.
Cash  received,  FMV  of  other  property  received,  plus  net  liabilities  assumed  by  other  party, reduced  (but not below zero) by any exchange expenses you incurred (see instructions)  . . 15
FMV of like-kind property you received  . . . . . . . . . . . . . . . . . . . 16
17  Add lines 15 and 16  . . . . . . . . . . . . . . . . . . . . . . . . . 17
18  Adjusted  basis  of  like-kind  property  you  gave  up,  net  amounts  paid  to  other  party,  plus  any exchange expenses not used on line 15 (see instructions)  . . . . . . . . . . . . . 18
Realized gain or (loss).  Subtract line 18 from line 17  . . . . . . . . . . . . . . 19
Enter the smaller of line 15 or line 19, but not less than zero  . . . . . . . . . . . . 20
Ordinary income under recapture rules. Enter here and on Form 4797, line 16 (see instructions)  21
Subtract  line  21  from  line  20.  If  zero  or  less,  enter  -0-.  If  more  than  zero,  enter  here  and  on Schedule D or Form 4797, unless the installment method applies (see instructions)  . . . . 22
Recognized gain.  Add lines 21 and 22  . . . . . . . . . . . . . . . . . . . 23
Deferred gain or (loss). Subtract line 23 from line 19. If a related party exchange, see instructions  . 24
Basis of like-kind property received.  Subtract line 15 from the sum of lines 18 and 23  . . 25Part IV Deferral of Gain From Section 1043 Conflict-of-Interest Sales
Note: This part is to be used only by officers or employees of the executive branch of the Federal Government or judicial officers of the Federal Government (including certain spouses, minor or dependent children, and trustees as described in section 1043) for reporting nonrecognition of gain under section 1043 on the sale of property to comply  with the conflict-ofinterest requirements. This part can be used only if the cost of the replacement property is more than the  basis of the divested property.
Enter  the  number from  the  upper  right  corner  of  your  certificate  of  divestiture. (Do  not  attach  a copy of your certificate. Keep the certificate with your records.)  . . . . . . . . . .
Description of divested property
Description of replacement property
Date divested property was sold (month, day, year)  . . . . . . . . . . . . . . . 29  MM/DD/YYYY
Sales price of divested property (see instructions). . . . . . 30
Basis of divested property  . . . . . . . . . . . . . 31
Realized gain.  Subtract line 31 from line 30  . . . . . . . . . . . . . . . . . 32
Cost of  replacement property purchased within 60 days  after date of sale  . . . . . . . . . . . . . . . . . . . . 33
Subtract line 33 from line 30. If zero or less, enter -0-  . . . . . . . . . . . . . . 34
Ordinary income under recapture rules. Enter here and on Form 4797, line 10 (see instructions)  35
Subtract  line  35  from  line  34.  If  zero  or  less,  enter  -0-.  If  more  than  zero,  enter  here  and  on Schedule D or Form 4797 (see instructions)  . . . . . . . . . . . . . . . . . 36
Deferred gain.  Subtract the sum of lines 35 and 36 from line 32  . . . . . . . . . . 37
Basis of replacement property.  Subtract line 37 from line 33  . . . . . . . . . . . 38

Related Info: 8824, form, requested, information, line, like-kind, instructions, gain, party, date


In a 1031 Exchange, what is the classification "real estate held for sale"?

Of the IRS's 4 classifications of  Real Estate this term can be the most difficult to taxpayers to grasp. The correct term is "real estate held for sale to customers". Our 1031 Exchange Knowledge Base has a very insightful article about this subject. Here is an excerpt that will be very valuable to you.
"This classification is known as dealer property. To be classified dealer property, the property must be held at the time of sale or exchange
primarily for sale
to customers
in the ordinary course of business.
All three elements must exist at the time of sale or exchange or the property will not be classified dealer property. Primarily for sale means of the first importance. It does not have to constitute more than 50% of the purpose—it need only be the most important. The Supreme Court said, “If an owner acquires a property for rental or investment use, but also plans to sell the property and realize gain in any way he can if the original plan becomes unfeasible, he does not hold the property primarily for sale.”
All buyers of real estate are customers as the term is used here. The activity “in the ordinary course of business” must be directly related to the sale of that property. In addition, the activity must be “busy.” The two “busy” activities usually related to sales or exchanges are
1. sales activities related to the property, and,
2.physical improvements to the property.
Many people, including many IRS agents, misunderstand this activity. To be classified dealer property, there must exist a busy business activity directly related to that property. If you buy a parcel of land, subdivide it, and build houses for sale, there's no question you have dealer property. But if you buy a parcel of land, make no physical improvements, subdivide it by getting it rezoned and meeting other legal requirements, and sell it in the form of an unsolicited offer—you get capital gain treatment. The reason? No business activity related to the property. [iii]
If the property is listed with a licensed real estate broker, the sales activities of the real estate broker are not considered to be the sales activities of the owner.
The Tax Court has held the real estate activities of corporations owned or controlled by an individual cannot be attributed to him even though he may be engaged full-time as an officer of the corporation.
Licensed real estate brokers and salespersons ordinarily are not dealers. In Scheuber v. Com. 371 F2nd 996, it was held properties purchased by a licensed real estate broker (who intended ultimately to sell) and held for realization of appreciation in value over a substantial period of time were capital assets.
If dealer property is sold at a gain, the gain is taxed as ordinary income. If dealer property is sold at a loss, the loss is deductible as an ordinary loss."

Related Info: sale, estate, real, classification, dealer, related, activity


Does improved land for unimproved land qualify as a 1031 exchange?

Land, regardless of how it is zone, or whether it is improved or not, qualifies for like-kind treatment in a 1031 Exchange. Investment real estate is a capital asset (IRC Section 1221). It's property held primarily for appreciation of value due to location, passage of time and other factors outside the activities of the owner. It is treated as a portfolio investment asset. An example of investment real estate is raw land held for appreciation. Even if purchased with the idea you might someday develop the property, if you don't develop it (for any reason), the property will not lose its classification as investment property. Additional reading can be found here.

Related Info: land, qualify, unimproved, improved, investment, estate, develop, appreciation, real






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