The owner in this scenario sold her home in MA and passes papers sept 17th. The property is a condo across street from lake. The HOA won a legal battle for private beach, mooring, and dock rights a decade ago. My father and mother bought in part because of possibility of beach rights. After getting beach rights the property value went up and the HOA voted to add garages and porches. But HOA is very strict about renting units out,has to be one month minimum. She has rented in past but not during summer because people do not rent by the month.
She is planning on us as a family to see a lawyer/cpa in the next week or so so that if she needs a nursing home the property will be ok. She does not know what a 1031 exchange is and believes she has to make this property her residence for 2 years before she can sell without getting taxed. She has little money even with selling but is on a fixed income that really won’t allow her to live in property even if she wants.
Can this property be considered an investment and therefore be eligible for 1031?
FYI property can be sold for 300k and realtor not needed. She has mortgage of 90k and originally bought property for 60.
If it’s not her residence, then it IS an investment. Those are the only two options.
A 1031 Exchange involves the sale of the property through conventional methods! The proceeds of the sale "Must" be recieved by a 1031 Exchange trustee who holds the money on behalf of the seller! (Do not take the money to yourself first as it voids a 1031 exchange)
The trustee holds the money and you as seller have 45 days from the closing to name up to three properties you would like to exchange your funds into, you must buy a property of equal or greater value and your funds being held by the 1031 Trustee are your down payment for new financing and closing costs.
Any money left over is returned at closing and you would then pay regular capital gains taxes on that amount.
In this situation you could buy a say $500k to $600k apartment building with your proceeds!
Make sure you consult with your accountant and a 1031 Exchange Trustee to make sure of the specifics? If you find the right Class C, 10 to 12 cap rate say 8 plex it should provide some positive cash flow and a tax shelter that tenants are paying down the mortgage!
Just be sure of what your doing before you do it as the wrong way results in no tax benefit and problems.