How do I designate residential realty for a 1031 exchange?

September 10, 2003

Subject:  1031 Exchange

From:  Erlinda
Date:  Sat, 09 Aug 2003

Dear Michael,

If I am able to do a 1031 exchange to a brand new home designated as residential, can I convert it to a rental to qualify for the exchange? When should I do it?

Thanks for your advice,
Erlinda

Answer

Date:  Fri, 29 Aug 2003

Hello Erlinda,

1031 exchanges are only available when the property given up and the property received are qualifying property, which doesn't include a personal residence. However, residential housing that is rented to someone else isn't a personal residence. You should designate the replacement property as residential rental property from the outset, including any application for financing the house and your paperwork with the county assessor. (This means you will pay a higher interest rate.)

By the way, tax-deferred exchanges aren't as good of a deal under the 2003 tax legislation. By allowing the sale to be taxed, you may pay a federal tax of 15% on most of the gain, but claim tax deductions for depreciation expense on the replacement property and receive a tax benefit up to 35%.

See your tax advisor.

Good luck!
Mike Gray

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