1031 Exchange

[Looney1966]

Hello,

We have rental property that we are selling for $265,000 in 2021 and bought it in 2006 for $143,000.  We want to use a 1031 exchange.  

We plan on using $90,000 of the proceeds from the sale buy a trailer in a retirement community (where you own the trailer and the land) which we plan to use as a rental property for $72,000 and we are looking at buying a piece of land for $20,000 as an investment property.  

Can I use the 1031 exchange because I am buying these two pieces of property with the proceeds?

Thank you.

[M-MTax]

You can buy as many replacement properties as you like. BUT note that unless you replace the entire $265k you getting for the rental you own now you'll have capital gain and depreciation recapture on that part of the $265 you don't use for replacement property.

[Looney1966]

My total basis is $145,268. - $77,879 (depreciation recapture) = $67,389(new basis) and if I only invest a total of $90,000 of the $265,000 that we sell the property for, will I pay capital gains on $107,611?

$265,000(sales price) - $67,389(basis after recapture) - $90,000(new investment) = $107,611?

I just want to be sure that is the way I understand that.

Also, if that is the case, how do I let IRS know I am purchasing the new property to avoid the gains tax on that part?

Do I only have a certain amount of time to make this purchase?

[M-MTax]

Yes there are time limits......read the info here: https://www.irs.gov/pub/irs-news/fs-08-18.pdf

Yes you will pay tax if you don't spend at least $265k on the replacement property.

[Rick19744]

A couple of notes on this:

1. Unless your exchange is equal to or greater than the old property, you will be subject to tax on some of the gain.
2. I would highly recommend you use a qualified intermediary to handle this transaction.  A simple foot fault will collapse the entire transaction and you will no longer qualify for Section 1031 deferral.
3. I would also make sure you get legal / professional advice on whether the trailer qualifies as real property in your local.  This is not always a given.  Since the Section 1031 rules have narrowed, unless the trailer qualifies as real property you will not be able to take advantage of Section 1031.