People who buy property for trading up in size, downsizing, acquiring a second home or retirement home or simply buying an investment property need help you get them there. My goal is to be your real estate resource to keep you informed about the market trends in Summit County and the surrounding communities including Breckenridge, Frisco, Keystone, Dillon, Silverthorne and Copper Mountain.
When it comes to purchasing a resort property, I believe it is important that you have a good knowledge of the process in our market place so that you know what to expect from start to finish. You have lots of choices in picking your real estate professional and I sincerely appreciate the opportunity to help you have the best real estate experience of your life!
The IRS Rules for Exchanges…
You will need to follow six primary rules for your exchange to meet stringent IRS regulations:
1 Real Property Use. Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate.
2 45 Day Identification Period. You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.
3 180 Day Exchange Period. From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45-day list. Again, there are no exceptions to this deadline.
4 Qualified Intermediary (QI). The IRS mandates that you use a QI to prepare the legal documents for your exchange. Because the QI must be independent, it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so that you do not have access to it.
5 Proper title holding. You must purchase and take title to your new property exactly as you held title to your old property.
6 Reinvestment Requirement. To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. Also, you must reinvest all of the cash proceeds from your sale.
For information about these rules, call one of the experts toll free at 866-694-0204 or visit on line at www.expert1031.com
Revenue Procedure 2008-16 (the “Procedure”) creates a safe harbor definition of investment property applicable to exchange transactions closing after March 10, 2008 that involve the transfer of property consisting of a dwelling unit (defined below) and/or the acquisition of a dwelling unit as replacement property. In short, the IRS will not challenge whether a residential property or vacation home property is held for productive use in a trade or business or for investment if certain specified ownership and use requirements are met. This safe harbor Procedure provides useful guidance on the characterization of vacation property and may also be useful for planning purposes such as the conversion of a principal residence into a qualifying relinquished property.
REQUIREMENTS OF REVENUE PROCEDURE 2008-16
A dwelling unit is defined as any real property improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including a sleeping space, bathroom and cooking facilities (e.g., a residential property). The IRS will not challenge whether a dwelling unit qualifies as §1031 exchange property held for productive use in a trade or business or for investment if: (1) the relinquished property is owned by the taxpayer for at least 24 months immediately prior to the exchange and a replacement property is owned for at least 24 months immediately after the exchange (the “qualifying use period”) and (2) within each of the two 12 month periods constituting the qualifying use period, the taxpayer must:
a) Rent the property to another person or persons at a fair rental for 14 or more
days; and
b) The taxpayer’s personal use of the dwelling unit cannot exceed the greater of 14 days or 10 percent of the number of days during the 12 month period the dwelling unit is rented at a fair rental.
Under the Procedure, personal use of a dwelling unit occurs on any day in which the taxpayer is deemed to use the property for personal purposes under §280A(d)(2) (taking into account §280A(d)(3) but not §280A(d)(4)). Thus, personal use includes: (1) use by the taxpayer or any other person who has an interest in the property or by a family member; (2) use by any individual who uses the property under an arrangement that provides the taxpayer with some use of the property; or (3) use by any other individual if rented for less than fair market value. A taxpayer can rent the property to a family member if the family member uses the property as a primary residence and the family member pays fair market rent. Whether a dwelling unit is rented at a fair rental is determined based on all the facts and circumstances that exist when the rental agreement is entered into. All rights and obligations of the parties to the rental agreement are taken into account.
SAFE HARBOR BUT NOT A “BRIGHTLINE” TEST
The Procedure provides a safe harbor for purposes of characterizing investment property for purposes of Internal Revenue Code §1031. Property that does not meet the terms of the safe harbor may nevertheless constitute qualifying relinquished or replacement property under current law. Of course, any exchange must meet all other applicable legal requirements. Every taxpayer should consult with their legal and tax advisor before engaging in any §1031 exchange.
The content is general in nature and should not be acted upon without further guidance from your tax counsel.
