Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
Here's my situation. I have a rental unit that ultimately I'd like to convert via 1031. I understand the new property I buy via 1031 must also be "like-kind" exchange, i.e., another rental property. But eventually I'd like to move into this rental property as my forever retirement home. I understand I need to rent it out for a minimum period of 2 years in order to satisfy IRS rule under 1031. I'd like to circumvent this 2 year period so here's my "evil plan".
After I purchase the new property under 1031. I will lease it out to a "HB2HSV LLC" which I also own for a period of 2 years. At the end of 2 years I would then take over as individual owner and make it my permanent residence. This way, on paper I will satisfy the IRS rule of using it as a rental property for a period of 2 years.
Does anyone see anything wrong with this plan?
You're not the first person to think of this and it will surely put you on the IRS' radar screen. It seems to scream "fraudulent intent".
After I purchase the new property under 1031. I will lease it out to a "HB2HSV LLC" which I also own for a period of 2 years. At the end of 2 years I would then take over as individual owner and make it my permanent residence. This way, on paper I will satisfy the IRS rule of using it as a rental property for a period of 2 years.
Does anyone see anything wrong with this plan?
It's tax fraud. When (not if) you get caught the IRS will relieve you of much money and penalties.
Better idea (legal):
Get rid of your tenants. Live in it for two years. Then sell it and buy your forever home. Any gain up to $250K ($500K if married) is excluded.
I did that with one of my rentals. Worked out very well.
It's tax fraud. When (not if) you get caught the IRS will relieve you of much money and penalties.
Better idea (legal):
Get rid of your tenants. Live in it for two years. Then sell it and buy your forever home. Any gain up to $250K ($500K if married) is excluded.
I did that with one of my rentals. Worked out very well.
It's not quite that simple.
I looked into this. For simplicity let's say I rented out 8 years prior to that then I live there for 2 years, I will only be entitled 2 out of 10 years (20%) of the $500K (married) deduction.
It's tax fraud. When (not if) you get caught the IRS will relieve you of much money and penalties.
Better idea (legal):
Get rid of your tenants. Live in it for two years. Then sell it and buy your forever home. Any gain up to $250K ($500K if married) is excluded.
I did that with one of my rentals. Worked out very well.
Well, not quite. There's still depreciation recapture and the exclusion is prorated. You may have gotten away with something (depending on when you did that) but that's not how it works today.
I looked into this. For simplicity let's say I rented out 8 years prior to that then I live there for 2 years, I will only be entitled 2 out of 10 years (20%) of the $500K (married) deduction.
Here's my situation. I have a rental unit that ultimately I'd like to convert via 1031. I understand the new property I buy via 1031 must also be "like-kind" exchange, i.e., another rental property. But eventually I'd like to move into this rental property as my forever retirement home. I understand I need to rent it out for a minimum period of 2 years in order to satisfy IRS rule under 1031. I'd like to circumvent this 2 year period so here's my "evil plan".
After I purchase the new property under 1031. I will lease it out to a "HB2HSV LLC" which I also own for a period of 2 years. At the end of 2 years I would then take over as individual owner and make it my permanent residence. This way, on paper I will satisfy the IRS rule of using it as a rental property for a period of 2 years.
Does anyone see anything wrong with this plan?
Quote:
Originally Posted by jackmichigan
You're not the first person to think of this and it will surely put you on the IRS' radar screen. It seems to scream "fraudulent intent".
I appreciate Jack's helpful advise but I came up with a new twist of my "evil plan"
So from Jack's link I can not rent to an entity that I have at least 50% ownership.
What if I lease it to a family member, have all "legal documents" such as a lease agreement. But I move in myself and simply funnel the rent payment through this family member. This way "on paper" I will show that I am receiving rental income for a period of 2 years?
Here's my situation. I have a rental unit that ultimately I'd like to convert via 1031. I understand the new property I buy via 1031 must also be "like-kind" exchange, i.e., another rental property. But eventually I'd like to move into this rental property as my forever retirement home. I understand I need to rent it out for a minimum period of 2 years in order to satisfy IRS rule under 1031. I'd like to circumvent this 2 year period so here's my "evil plan".
After I purchase the new property under 1031. I will lease it out to a "HB2HSV LLC" which I also own for a period of 2 years. At the end of 2 years I would then take over as individual owner and make it my permanent residence. This way, on paper I will satisfy the IRS rule of using it as a rental property for a period of 2 years.
Does anyone see anything wrong with this plan?
Would the transfer from your LLC to you personally be considered a "sale"? I'm thinking that it might be, so I would check on that.
I appreciate Jack's helpful advise but I came up with a new twist of my "evil plan"
So from Jack's link I can not rent to an entity that I have at least 50% ownership.
What if I lease it to a family member, have all "legal documents" such as a lease agreement. But I move in myself and simply funnel the rent payment through this family member. This way "on paper" I will show that I am receiving rental income for a period of 2 years?
So...are you asking whether you might have a greater chance of getting away with tax fraud if you did it this way? Possibly. Who amongst your family (or even friends) are willing to be complicit in such a scheme? You better hope that you always stay in their good graces. Usually the people who get away with tax fraud have an army of lawyers to shield them...like Donald Trump had when he did phony charitable deductions.
So...are you asking whether you might have a greater chance of getting away with tax fraud if you did it this way? Possibly. Who amongst your family (or even friends) are willing to be complicit in such a scheme? You better hope that you always stay in their good graces. Usually the people who get away with tax fraud have an army of lawyers to shield them...like Donald Trump had when he did phony charitable deductions.
So what you're saying is.... this is a better evil plan?
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
