Can vacation home qualify for a tax-deferred exchange?

Rules differ for investment properties
By: Robert J. Bruss: Inman News
DEAR BOB: I recently attended a real estate seminar conducted by an attorney. She said that even vacation-homeowners who have never rented their second homes can qualify for an Internal Revenue Code 1031 tax-deferred exchange of such property because they held it as an investment property in expectation of an increase in market value. Do you agree? How can I substantiate this position? – Joe P.

DEAR JOE: No, I don't agree with my fellow attorney. Ask if she has any Tax Court decisions or other basis to support her opinion. I will be very surprised if she has any credible support for her position.

Rental property and even vacant land can qualify for IRC 1031 tax-deferred exchanges. The reason is they are clearly held for investment or use in a trade or business, as required by IRC 1031. But a personal use vacation or second home doesn't fit into that tax category. For more details, please consult your tax adviser.

CAN FOUR VACANT LOTS BE TRADED FOR A PERSONAL RESIDENCE?

DEAR BOB: I own four vacant unimproved residential lots, which I purchased as an investment about a year ago. I will be moving and buying a home within the next two months. Can I roll the capital gains from the sale of my lots into the purchase of a new home without paying capital gains tax on my profit? – Lance M.

DEAR LANCE: Yes, but the house acquired must be used as a rental property. After a year or so of rental use, you can then convert it to your personal residence without owing any tax. Please consult your tax adviser for full details.

DON'T TRY SELLING APARTMENT BUILDING ALONE

DEAR BOB: I want to sell my apartment building. But I don't know how to write an attractive ad or what publications I should use. Any suggestions? – Henry S.

DEAR HENRY: Writing a newspaper classified ad to sell your apartment building is just the first of many problems to anticipate in selling your building alone.

Suppose you obtain an interested buyer. How will you prepare a binding purchase contract? How will you know the fair market value of your building?

My best suggestion is you list your apartment building with a professional real estate agent who specializes in selling property like yours. The sales commission will be worth the expense to have the property properly marketed with all the details correctly handled so you receive top dollar for your property. Selling an apartment building is definitely not a do-it-yourself job.

The new Robert Bruss special report, "24 Key Questions Answered: Living Trust Secrets Reveal How to Avoid Probate Costs and Delays," is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.