Question

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 1

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