Property held primarily for sale or resale and not for investment or productive use in a trade or business will not be considered qualifying property for non-recognition of capital gain treatment under I.R.C. §1031. Careful attention must be given to the facts and circumstances of each contemplated exchange. What about a person who is not a dealer but may have acquired property for the sole purpose of its eventual re-sale? Or land exchanged for improved property needing repairs and subsequently sold within a short
period of time suggesting the property was acquired primarily for re-sale? Persons planning an exchange after acquiring property for speculation or as a 'fixer-upper' may find themselves in the position of being given dealer status.
Holding the property for a longer time to establish a different intent is one way to help to avoid this determination. Ultimately the individual Exchangor's accountant or tax preparer will be the judge of whether the dealership issue is of concern with the Exchangor, after hearing all options, making the final determination about the treatment on their property.
Vacation homes present some interesting possibilities. A vacation home can be held for what is termed as mixed-use, held for personal use and for income producing purposes. It is possible the character of the property can take on a primarily personal appearance with the occasional rental activity. In such a case, the property will be considered primarily personal in use and, as such, will not qualify for an exchange under I.R.C. §1031. It also will not qualify as a personal residence. The disposition or sale of the property will result in a purely taxable event.
If personal use of a vacation home is minimal, it can be successfully argued the property is being held primarily for investment. Where income earned has been substantial, it can also be successfully argued the property is being held primarily for productive use in a trade or business. Both uses qualify the property for 1031 treatment. The Exchangor's tax counsel should determine whether property qualifies for non-recognition of gain under I.R.C §1 031.
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