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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: Re: 1031 Exchange? Date: 6/20/2005 2:48 PM
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I've just finished talking to Andy from Ayco. Those are the advisors you get through the Motely Fool. He could not provide detailed advice but said that generally, if we held the property as a rental for 2 years, we could then live in it. This according to a private letter ruling. He enphasized this was not a guarantee.

Correct - mostly - sort of. As others have mentioned, your intent is paramount here. I suspect that after doing a little more research, your intent will change. <wink, wink, nudge, nudge> ;-) The correct intent is to use the replacement property as a rental until you retire, then sell it and acquire your retirement home. Now if, when the time comes to actually occupy the retirement home, you decide that the property you currently own is fine as a retirement residence, then you don't need to sell it. Just move into it and start retiring. Your previous 1031 exchange will be fine as long as enough time has passed.

How much time is enough? That's what the advisor was hedging about. I believe there are two court cases bracketing what is acceptable and what is not. Two years was long enough, and 3 months was too short. In between those two has not be litigated, and not been clarified by any rulings or administrative decisions.

Just for conservatism, I feel compelled to mention that you origianlly said you bought your land to have a place to build a retirement residence. That would make it personal use property and not eligible for an exchange. Not that that fact has stopped other people before, mind you. But another bit if info for your thinking.

He also said that what we wanted to do (sell property to person A and buy new property from person B) is not an exchange and would not qualify. We have to exchange our lot for a property from another person. We cannot sell our property and shield the gain.

Well, no one actually does that. But 1031 exchanges happen all the time. What you need is an intermediary.

In theory, an intermediary (or accomodator) acquires the replacement property, exchanges it with you for the property you currently own, and then sells your property. In practice, it barely happens on paper. What they really do hold your sales proceeds waiting for you to identify and buy the replacement property. Then they send your sale proceeds to the settlement agent to use in the purchase of the replacement property. It's simpler that it sounds. Do a quick web search on "exchange accomodator" and you should find a couple of people willing to be accomodators to help you accomplish this goal.

He did point out that we would only pay 15% LTCapGains on the profit. In the case of us living in FL, and selling a property in CA, he wasn't sure if we would owe taxes to either state. FL has not state income tax, but I don't know if FL taxes capital gains.

California follows federal law on the 1031 exchange. So it wouldn't tax you right now. The tricky part is, technically, when you dispose of the replacement property you need to remember to pay tax on the deferred gain to California, even though the property isn't located there.

Obviously, we need a financial advisor on this. Does anyone know anything about the Dalbar rating service that the Fool uses to select advisors? Is this a respected rating service?

I know nothing about the rating service. However, after reading your comments, let's just say that I'm not impressed and leave it at that.

--Peter
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