A 1031 exchange allows the taxpayer to defer federal and state capital gain and depreciation recapture taxes when selling and replacing real and personal property held in the productive use of a business or for investment. The tax deferral strategy is not to be used for second homes with greater than 14 overnights of personal use or for those properties held primarily for profit such as flipping. Taxpayers whose income is derived primarily from real estate can utilize the 1031 exchange, but must be careful to hold those properties with the intent (good fact pattern) of investment including time, in a rental pool, limited personal use and separate from their normal business activity. Inventory, indebtedness, stocks and securities, partnership interests and primary residences are not eligible for a 1031 exchange.
Tags: primary residence
Taxpayers considering selling their farm or ranch with a primary residence can utilize both Section 121 and Section 1031 to exclude and defer capital gain taxes. Section 121 applies to the primary home while Section 1031 applies to the land and out buildings. This is also known as a mixed use property where a portion of the property is a personal residence and the acreage is held in the productive use of a business or for investment.
The character of a 1031 exchange property or primary residence can always be converted between personal and rental use. A property acquired as a rental property in a 1031 exchange can be converted to a primary residence by the facts that support the intent. Time is one fact of many, while additional supportive facts include where children attend school, where mail is received and the address registered with the local voting authorities.
Internal Revenue Code (IRC) Section 121 provides each taxpayer filing a federal tax return an exclusion on capital gains tax when selling their primary residence. Every two years, $250,000 for those filing a single return and $500,000 for those married filing a joint return is provided given:
With the recent increases in farmland values and drop in real estate prices, some smart landowners might consider selling their farm and purchasing a new home. What are the tax implications of these transactions? The answer depends upon such factors as whether the farm has been the taxpayer’s primary residence or not; and whether the taxpayer has intent to purchase new property of equal or greater value. The Internal Revenue Code provides multiple opportunities for taxpayers to maximize their benefits when selling their property including tax deductions on the sale of the primary residence and 1031 tax deferred exchanges.