My recent divorce gave my ex-wife some land that has development potential. Before the divorce I got the land rezoned to Rural Residential, 1 acre minimum lot size with all the necessary subdivision fees and development cost. My ex doesn't understand land and can't handle the decisions involved. All though she didn't want to be married anymore she calls 3 or 4 times a week with problems for me to solve and more questions.
I will be selling some land in the next few weeks and the money is going through a 1031 exchange. Can I buy an undivided 1/3 or 1/2 interest in her development land through the 1031? If I can, I would like to setup a LLC giving me the decision making powers for the subdivision and dividing the money made by percentage put in. We would both do all right on the deal and she could use my purchase cash for her share of the development cost. We are still "friends" and there is a possibility of putting our 25 year old son into the deal with a 10% interest.
One of the rules of a 1031 exchange is that properties involved in the exchange must be “like-kind.” Any real estate held for investment use that is exchanged for other real estate held for investment use is “like-kind” property.
Land that you intend to develop is not considered land held for investment use, but instead it is dealer realty. Dealer realty is not like-kind property and is not eligible to participate in a 1031 exchange neither as the relinquished property nor as the replacement property.
Consult your tax advisor for specific details.
Thanks Dave. Sorry I didn’t reply sooner but I have been moving to my new house and have been without internet service for awhile.
The land I am selling is rented farmland. The property that my ex owns is currently rented as farmland but is zoned rural residential. She has a rental agreement on the property for this year and crops are planted. Same with the other property that I own. This keeps the taxes at the farmland evaluation instead of the much higher residential lots evaluation. To me it looks like rental for rental. What my future intentions are should have no bearing on the exchange. With this information considered lets change the words development land to farmland in my question and ask it again. Can an exchange be done this way? Thanks for your input.
What my future intentions are should have no bearing on the exchange.
Sorry, but you can’t remove your intended use of the replacement property from the exchange umbrella. The replacement property must be used for an investment purpose to validate the exchange.
Consult a professional exchange accomodator for specific details.
“intent” is a tricky thing with the IRS and is usually built upon various pieces of tangential evidence. Also, a 1031 exchange has no absolute checklist of requirements so you have no way a priori to know 100%, without a doubt if you exchange will be deemed acceptable. Lastly, if challenged by the IRS, some time will have elapsed since the actual replacement property was acquired and thus your intent has been converted into actual practice.
If you chose to consult an accomadator, pick a firm that specialize or does this as their sole service they provide. There are a lot of folks about there who do offer accomadator services, but there is a much smaller subset who know not only the laws as they are written, but also current and historic rulings in the courts pretaining to the allowance of a 1031 exchange.
Gee, is this right about investment land for investment land? I didn’t think that was the case.
I’m not a Sec. 1031 expert, but back in graduate tax school, what I remember is that basically “real estate for real estate” was okay… it was the one area where you did have maximum flexibility.
The intent thing does matter of course…
And, BTW, what I remember is that using Sec. 1031 for personal property was where things get nit-picky.
SeattleCPA,
You may remember from your tax school classes that only investment property or property used in a trade or business is eligible to participate in a 1031 exchange. You may also remember that the relinquished property must be exchanged for like-kind property.
When you exchange business or investment use real estate for like-kind property, then by default, the replacement property is investment or business use real estate. Essentially any real estate can be exchanged for any other real estate, but to meet the like-kind requirement, both the relinquished property and the replacement property must be USED for a qualified purpose – as investment property or as property used in a trade or business.
Personal use property (such as your primary residence or a second home) as well as dealer realty are excluded from participating in a 1031 exchange because these properties are not held for investment nor for use in a trade or business.
OK, I checked the tax library… and maybe we’re not communicating. I read primary on-point authority: Reg. Section 1.1031(a)-1(a)(1) to say very clearly that you can exchange investment real property for real property used in a trade or business.
The tax library commentator says the same thing…
Yes, that is what I said, too, in my response to your previous post. Yes, it is correct that investment real estate can be exchanged for investment real estate and/or business use property and vice versa. Nevertheless, not “all” real estate is eligible to participate in an exchange as you seemed to imply in your comments.
I see where you are coming from in your earlier posts, and, I did give an incomplete response to beggyone – incomplete but not incorrect. beggyone’s question assumed that the proposed replacement property was eligible to participate in a 1031 exchange.
This question was posted in the Residential Forums and not in the Commercial Forums so expanding my response to include business use property seemed irrelevant to beggyone’s strategy since his stated intent was to develop for resale. Remember, he said that the land he proposed for the replacement property was zoned for residential use.
Therefore, I responded to his question within my interpretation of the context in which the question was asked and confined my response to the information relevant in that context.
While my response was correct for beggyone within the context of the situation constrained by his specific parameters, I can see now that confining my comments to the only exchange option that applied to beggyone may give the casual reader the impression that an exchange is restricted to only this option. I will endeavor to give more complete answers in the future.
No, no, no, don’t apologize! You gave a good answer. Caused me to go re-read a reg I’d looked at in, er, years. :smile