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So if I haven't rented the property out, is it still considered investment property? I plan on buying land, building a house, then selling. I thought that would be considered investment property. Is what I'm doing considered under the 1031 property exchange?
First, if you own a property as your primary residence and have lived there for 24 months out of the last 60 months and you have not used the $250,000/$500,000 tax exclusion in the past 2 years - you can keep the profit tax free up to the single/married limits as stated above.
Second, if you own a property for investment purposes (ie not your primary or secondary residence) even if it never makes a dime in rent it could still qualify for a starker 1031 tax deferred exchange provided you meet every deadline and use a Qualified Intermediary (QI) to hold the funds between closings. There are no excetions for missing deadlines! If you own the property for 366+ days long term capitol gains tax applies!
Last edited by 2bindenver; 06-10-2007 at 10:05 AM..
Do Not Attempt This Without Consulting a Professional
Quote:
Originally Posted by cspeaker
So if I haven't rented the property out, is it still considered investment property? I plan on buying land, building a house, then selling. I thought that would be considered investment property. Is what I'm doing considered under the 1031 property exchange?
The question is: Have you lived in the home 2 consecutive years? If so, then the home qualifies as your primary residence and the gain will be excluded from taxable income as long as it doesn't exceed the $250k/$500k mentioned in earlier posts.
If you don't live in the home and are simply building a "spec" home to sell, then your property would probably qualify as an "investment" property. An investment property is any property (raw land, rental, house, commercial bldg., etc) that is held for investment. You could then do a 1031 exchange into another investment property. To owe no taxes, the basis of the new property would have to be higher than the basis of your current property and there are STRICT guidelines for making the exchange which involve both time deadlines and using a qualified intermediary. You do not want to do a 1031 exchange for the first time without proper advice from professionals. You could also take some funds from a 1031 exchange (called "boot") and use that money however you see fit (including paying down your mortgage on your primary residence); however you would owe taxes on any money that you receive in a 1031 exchange.
This is just very general, here. Look for a 1031 exchange class in your area. A lot of title companies and QI's will sponsor them. That would be the best place to start. Also, you'll want to make sure you hire a CPA and realtor that are familiar with the 1031 exchange process. A misstep could cost you big $$ in taxes.
The question is: Have you lived in the home 2 consecutive years? If so, then the home qualifies as your primary residence and the gain will be excluded from taxable income as long as it doesn't exceed the $250k/$500k mentioned in earlier posts.
If you don't live in the home and are simply building a "spec" home to sell, then your property would probably qualify as an "investment" property. An investment property is any property (raw land, rental, house, commercial bldg., etc) that is held for investment. You could then do a 1031 exchange into another investment property. To owe no taxes, the basis of the new property would have to be higher than the basis of your current property and there are STRICT guidelines for making the exchange which involve both time deadlines and using a qualified intermediary. You do not want to do a 1031 exchange for the first time without proper advice from professionals. You could also take some funds from a 1031 exchange (called "boot") and use that money however you see fit (including paying down your mortgage on your primary residence); however you would owe taxes on any money that you receive in a 1031 exchange.
This is just very general, here. Look for a 1031 exchange class in your area. A lot of title companies and QI's will sponsor them. That would be the best place to start. Also, you'll want to make sure you hire a CPA and realtor that are familiar with the 1031 exchange process. A misstep could cost you big $$ in taxes.
If you build a home as a spec home and then sell it, you definitely want to talk with a tax professional, because I've been told by tax professionals that it is not considered an "investment" and probably couldn't be used in a 1031 exchange. In addition, you'd be taxed at your normal tax rate (not capital gains rates) and if you do this several times, you might also have to pay social security/medicare taxes.
If you build a home as a spec home and then sell it, you definitely want to talk with a tax professional, because I've been told by tax professionals that it is not considered an "investment" and probably couldn't be used in a 1031 exchange. In addition, you'd be taxed at your normal tax rate (not capital gains rates) and if you do this several times, you might also have to pay social security/medicare taxes.
If building spec homes is a "business", then rstate is correct and you would be taxed at a normal tax rate, in which case you'd probably opt for Sub S Corp status. You definitely need to talk to your tax advisor to determine what's best for your particular tax situation. Make sure you do this before you get too far along with your plans. It's always better to know what your tax liability is going to be at the outset rather than at the end. Usually you're stuck at that point!
First, if you own a property as your primary residence and have lived there for 24 months out of the last 60 months and you have not used the $250,000/$500,000 tax exclusion in the past 2 years - you can keep the profit tax free up to the single/married limits as stated above.
Second, if you own a property for investment purposes (ie not your primary or secondary residence) even if it never makes a dime in rent it could still qualify for a starker 1031 tax deferred exchange provided you meet every deadline and use a Qualified Intermediary (QI) to hold the funds between closings. There are no excetions for missing deadlines! If you own the property for 366+ days long term capitol gains tax applies!
I have a more complicated situation and wonder if anyone can help:
I lived in our second home for 2.5 of the last five years (title is in my husband and my names). My husband lived in our primary home for 15 years, I have moved back to ph 2 years ago. My daughter has been living in the second home for three years, with myself living there for extended periods of time, due to business.
We have just sold the second home and made profit of $330,000.00. How do we claim the exemption - both husband and wife did NOT live in second home, so can't take the $500,000.00. Can I (wife) take the $250,000 and pay taxes on the balance of the profit?
Second question:
The second home that we just sold is a Manhattan co-op and we want to purchase another second home with the profit on the one we just sold. I will live there when in NYC on business, my daughter will live there on a permanent basis. I qualify for a second home mortgage. (Remember, husband is still in the primary home in California-has been all this time). The co-op board of this new co-op apt we want to purchase does NOT want anyone but my daughter on the title (doesn't want rif-raf like parents to legally be able to move into the small apt) - which means we will not 'own' this new apt.
So, my question is, if my husband and I are not on the title, and we take out a mortgage for the apt, it will be considered an 'investment' with my daughter living in it. This means our second home becomes an investment in terms of the mortgage, but it is the daughter's primary residence - so we don't get any further tax deductions....we aren't technically the owners, so can't claim the interest deduction - (daughter will be paying the monthly payments - so she can claim the interest deduction I guess...which means she needs to put her name on the mortgage, right?)
In the above situation, I don't see any tax breaks for my husband and I, other than the initial one I describe, with me getting $250,000 profit tax free and paying taxes on the $80,000 profit balance.
Any suggestions on what we should do? We (Husband and I) want to be on the title....as we are paying the down payment and will help with the monthly maintenance - all three of us can be on the title, except that the co-op board doesn't want that....
Can one turn a second primary residence into an investment property (ie., daughter living there) and get any benefits on this?
Remember that if you covert your investment property to your primary residence and live in it for two years you will still be taxed on recaptured depreciation even though there is no Capital Gains!!
If the property in question is your principle residence you may take a cap gains. exclusion of $250k per spouse. This exclusion can be used every 2 years providing you have resided in the property for 2 of the previous 5 years. These 2 of 5 yrs do not have to be consecutive. Also, as mentioned above, you can also convert a primary residence to investment property and vice/versa without penalty. Another awesome technique is the possibility of taking 1031 exclusion in combination w/ the primary residence exclusion. I have a blog about this at Tennessee 1031 Exchange Education Home. Don't hesitate to call 800-332-1031 if you have further questions.
Smiles,
Kimberly Tomlin-Ladd
I have an investment property i am selling. I want to use the money to build an investment house in a different lot. Can I use a 1031 exchange and not pay capital gains tax on the money that is going toward the building of the new house?
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Do Not Attempt This Without Consulting a Professional
Primary vs investment
