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by Kevin Just, CPA
I purchased a house through a 1031 exchange in August with the intention of renting it. I've not had any takers, however. Should I do another 1031 exchange and purchase a rental property in an area with a better market? If so, will I be taxed on the sale of my current property?
Whether or not you should purchase property in another area is something only you can decide. As for your tax question, you should not be taxed if you do another 1031 exchange even if the house you purchased in August has gone unrented.
The requirements under Internal Revenue Code Section 1031(a) (1) are as follows: "No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment."
Your intent was to productively use the vacant property. The IRS should not hold it against you that you were unable to rent it. Furthermore, there is no required holding period for property acquired in a tax-free exchange. Therefore, if you decide that your real estate investment dollars will be more productive in another area, you can do another tax-free exchange into new real estate.
Like-kind exchanges are complicated. You would be wise to seek legal advice or consult a CPA should you want to transfer your property in a future 1031 exchange. You can find out more about like-kind exchanges by listening to CalCPA’s Financial Empowerment podcast on the subject.
Kevin Just, CPA, is the managing partner of Just, Gurr & Associates.
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In accordance with IRS Circular 230, the information on this website is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.