1031 exchange Rental property Pandemic Vacancy

LeilaniM — Mon, 18 Sep 2023 18:50:51 GMT

I had an investment condo in Hawaii. Bought it in 1998 and it has been on my schedule E ever since. In late 2019, I decided to do a major renovation (windows, kitchen, door, bathrooms, etc.). We were 95% finished with the remodel in February 2020 and headed back to the mainland with plans to return in a couple of weeks to wrap up the project and remove our tools etc. Then the lockdown occurred. The unit was vacant from February 2020 to March 2022. I sold the unit in April 2022 and did a 1031 exchange into a property in my home state.

I continued putting the unit on my schedule E for 2020 and 2021 with no income and the usual expenses including depreciation. The unit couldn't be rented because the remodel wasn't complete and I wanted to finish the remodel myself and clear out the tools and materials I left in the unit. The delay was due to the pandemic.

The remodel was completed in January of 2022 and the sales process commenced with closing in April of 2022. The 1031 exchange deadlines were complied with and the replacement property was purchased in May of 2022. The new property is on my schedule E as of 2022.

Questions:

1. Did I disqualify the 1031 exchange because the property was vacant for 2+ years with no income?

2. Do I need to amend my 2020 and 2021 taxes to remove the expenses I claimed for the vacant property - even though it was pandemic-related?

3. If I remove the deductions I took on the 2020/2021 returns, can I add the cost of the remodel to the basis of the acquired property?

My intent was to rent the condo after the remodel, but after the pandemic and the frustration of not being able to get to Hawaii to do the work, I changed my mind and decided to sell/exchange the property for something closer to home.

Any help or advice would be greatly appreciated!

Re: 1031 exchange Rental property Pandemic Vacancy

Anonymous_ — Mon, 18 Sep 2023 20:40:28 GMT

Your scenario is complex so you should consult with local tax and legal counsel.

However, provided there was no personal use (i.e., it was strictly investment property that was previously rented), failure to generate income (in terms of rental income) would not invalidate your exchange.

You should absolutely not start amending returns before you consult local tax and/or legal counsel. For example, if you filed your 2020 return on time (on or before April of 2021), the three-year SOL will have run by next April. See tax and legal professionals.

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1031 exchange Rental property Pandemic Vacancy

Re: 1031 exchange Rental property Pandemic Vacancy