In: Accounting
Melissa owns a residential lot in Spring Creek that has appreciated substantially in value. She holds the lot for investment. She is exchanging the lot with her father for a residential lot in McComb that she also will hold for investment. Identify the relevant tax issues for Melissa
Answer
If you make a simultaneous exchange of one property for the other with cash paid or received and if there is no reduction of debt in connection with the exchange, it would be a tax-free exchange.
If You want to sell your property, look for a replacement property
of a higher value, find a seller later and treat it as a tax-free
exchange:
You could sell your property for $150k, park the proceeds with an
intermediary, add $50k cash to buy a $200,000 property, identify
and close within the alotted time and qualify for a tax-free
Section 1031 Exchange if you use a qualified intermediary.To make a
tax-free exchange you can assign your sales contract to the
intermediary, trade the property to the intermediary with an
additional 50K, let the intermediary sell for 150K, instruct the
intermediary to purchase the 200K property, and receive the
replacement property from the intermediary to complete the trade.
If done within the allotted time, that would qualify.
A qualified intermediary is the best way to go (according to the
rules to avoid a taxable transaction) unless it is truly an
exchange between only 2 parties.
There is NO Income tax if
1.No cash is taken out of the exchange
2.There is no net reduction to debt