Safe Harbor for 1031 Exchange
Effective for all exchanges on or after March 10, 2008, Rev Proc 2008-16 creates a safe harbor (meaning the IRS will not challenge the exchange) for “dwelling units” that meet the following criteria:
The relinquished property:
1. Was owned by the Taxpayer for 24 months prior to the exchange, and
2. Was rented for 14 days or more in each of the two 12-month periods immediately preceding the exchange.
3. The Taxpayer’s personal use in each of those years did not exceed the greater of 14 days or 10 percent of the number of days the property was rented at fair rental rates.
The replacement property must meet the same criteria. And the exchange must meet all other §1031 requirements.
It is unknown how the IRS will view properties that do not fall within this safe harbor.
The relinquished property:
1. Was owned by the Taxpayer for 24 months prior to the exchange, and
2. Was rented for 14 days or more in each of the two 12-month periods immediately preceding the exchange.
3. The Taxpayer’s personal use in each of those years did not exceed the greater of 14 days or 10 percent of the number of days the property was rented at fair rental rates.
The replacement property must meet the same criteria. And the exchange must meet all other §1031 requirements.
It is unknown how the IRS will view properties that do not fall within this safe harbor.
posted by Will @ 1:20 AM
4 Comments:
At 11:26 AM,
Renuka said…
what is down side of 1031 exchange
At 11:19 AM,
Poly Muthumbi said…
what is down side of 1031 exchange...
very important question about 1031 exchange. I will reply soon here so keep checking...
At 3:17 AM,
Will said…
1. The 45 day and 180 day datelines restriction. Remember:
• You must identify up to 3 replacement properties by the 45th day after the sale of your relinquished (old) property.
•You must complete your purchase (of one or more of the properties identified) by the 180th day following the sale of your relinquished property.
If you miss the datelines, you're not eligible for the 1031 exchange and will be taxed accordingly.
2. Another down side to 1031 exchanges is handling depreciation can be tricky. You don't start a new depreciation schedule. Check Section 1250 Depreciation Issues with the IRS.
At 3:24 AM,
Will said…
There are three primary disadvantages in doing a 1031 exchange:
1. To totally avoid all income taxes, all of the equity in the old property must be carried forward into the new property, not allowing any cash to be retained by the Exchanger. This restriction can be mitigated by refinancing the new property after completion of the exchange. There are tracing rules on the interest paid on the amount of funds refinanced that could impact the deductibility of that interest. Deductibility depends upon the use of the refinanced funds and other tax factors.
2. The new (replacement) property does not get a stepped-up income tax basis for the portion of the equity and debt replaced from the old (relinquished) property. The depreciation schedule(s) from the relinquished property(ies) are carried over to the replacement property(ies), and any additional acquisition cost of the replacement property(ies) is placed on a new depreciation schedule using depreciation lives imposed on real property by the 1986 Tax Reform Act, further modified by the 1993 tax act:
Residential Property 27-1/2 years
Non-residential Property 39 years
3. The Exchanger is required to replace the investment or trade/business property with like-kind property. That is, real property must be replaced with real property and personal property with personal property of the same class. The only limitations on real property are that it cannot be the Exchanger’s personal residence and that U.S. real property cannot be replaced with foreign real property and vice versa.
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