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Talk:Like-Kind Exchange

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Please note - if you have a question have like-kind exchanges, you are really much better off asking the question elsewhere - either on the Tax Forum, if you are a tax professional, or directly to your own paid professional tax preparer (or at TurboTax.com) if you are not a tax professional.'


Do the proceeds from a sale of real property have to be deposited in an escrow account before being used to purchase another business property to qualify for Like-kind exchange?

Posted by: Abdulkhan at 12:34 p.m. on 21 June 2005.


If the taxpayer has received the proceeds (i.e. money) the like kind exchange is blown. A like kind exchange must be property for property. Not sell property, take the proceeds and buy another property. There are ways to ust a qualified intermediary to facilitate a transaction like that.
To be a like kind exchange all six of the following must be met: 1. Property traded (not sold) and property received must be held by the taxpayer for business or investment purposes. 2. Property must not be inventory. 3. There must be an exchange of property. 4. Exchanges of intangible property cause problems...more homework is required. 5. Property to be recieved must be identified within 45 days. 6. Property must be received within 180 days or the due date (including extensions) of the tax returns.
Talk to a CPA before you sell the property to structure the exchange properly.
Posted by Aloysius

1031 Exchanges

Potential 1031 Exchange for client who owned home in another state for 2004 that has appreciated by $100,000 but never resided there. Residential home was vacant for 12 months. I advised he may want to try a 1031 Exchange, but I discovered he claimed the 1098 mortgage interest and property taxes on his 2004 Schedule A. He actually rented another property as his residence in my state in 2004. Can he claim that the taxes and interest for 2004 were for a "second" home so he can preserve his "investment property" status for the like-kind exchange? Can IRS tell the difference between second home interest and taxes versus a primary residence? If he was a renter for his primary residence, was he even entitled to the mortgage interest and taxes on his schedule A for 2004 in the first place? Would it be in his best interest to amend 2004 and take the mortgage interest and property taxes off, pay the tax, and then do the 1031 Exchange for like-kind investment property?

A taxpayer can deduct mortgage interest on a second home, even when they do not have deductible interest from a primary home. Regulation 1.163-10T(p) defines "Qualified Residence" for the purpose of the mortgage interest deduction. It defines "qualified residence" as the taxpayers principal residence OR the taxpayers second residence. You do not have to have a principal residence qualifiy for the deduction to be allowed a deduction on a second residence. (Also See IRS field service advice 200137033).
The address of the property on the 1098 might clue the IRS into the fact that it is a second residence (Since it differs from the taxpayers address on the return).
It is the taxpayers intent at the time of the exchange that controls whether or not the property is considered held for investment. (Revenue Ruling 57-244). Can you think of any means by which the taxpayer can demonstrate that the property was held for investment purposes in the year of exchange?
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What about someone who held a condo for investment but spent some time in it when unable to rent it and so filed it as a vacation home in several years prior to exchanging it for another residential rental property?

- 19:56, 1 September 2005

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