IRC §1031 "Tax Deferred Exchange"

Special Exemption of Capital Gains Tax

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www.RickNakama.com

Understanding Capital Gains in Real Estate

When you sell a stock, you owe taxes on your gain — the difference between what you paid for the stock and what you sold it for. The same holds true when selling a home (or a second home), but there are some special considerations.

How to Calculate Gain
In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. To calculate, follow these steps:

1. Purchase price: _______________________

The purchase price of the home is the sale price, not the amount of money you actually contributed at closing.

2. Total adjustments: _______________________

To calculate this, add the following:
Cost of the purchase — including transfer fees, attorney fees, and inspections, but not points you paid on your mortgage.
Cost of sale — including inspections, attorney fees, real estate commission, and money you spent to fix up your home just prior to sale.
Cost of improvements — including room additions, deck, etc. Note here that improvements do not include repairing or replacing something already there, such as putting on a new roof or buying a new furnace.

3. Your home’s adjusted cost basis: _______________________

The total of your purchase price and adjustments is the adjusted cost basis of your home.

4. Your capital gain: _______________________

Subtract the adjusted cost basis from the amount your home sells for to get your capital gain.

A Special Real Estate Exemption for Capital Gains
Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if you meet the following criteria:

You have lived in the home as your principal residence for two out of the last five years.

You have not sold or exchanged another home during the two years preceding the sale.

You meet what the IRS calls “unforeseen circumstances,” such as job loss, divorce, or family medical emergency.

Reprinted from REALTOR® magazine (REALTOR.org/realtormag) with permission of the NATIONAL ASSOCIATION OF REALTORS®.
Copyright 2008. All rights reserved. <-Click for Realtor.org original.

FOR FURTHER INFORMATION:
Tax Topic 409- Capital Gains and Losses
www.irs.gov/taxtopics/tc409.html
Tax Topic 701– Sale of Your Home
www.irs.gov/taxtopics/tc701.html
IRS Publication 523– Selling Your Home
www.irs.gov/pub/irs-pdf/p523/pdf
Tax Facts About Capital Gains and Losses
www.irs.gov/newsroom/article/0,,id=106799,00.html

Effective March 10, 2008 §1031 2008-16 Guidelines for Exchanging Vacation Homes.

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A new procedure from the IRS provides safe harbors for for §1031 "tax deferred exchange" of a vacation and second homes. Effective March 10, 2008, IRS Revenue Procedure 2008-16 provides guidelines for the qualifications that a taxpayer and vacation or second home owner must meet to consider a §1031 tax deferred exchange.

Click this link for IPX1031's explanation of this new strategy. http://ipx1031.com/pdf/DoVacation&SecondHomesQualify.pdf

Click for OREXCO's email announcement about this new strategy.

Investment Property Exchange Services Inc.'s Summary of Vacation Home Exchanges.

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Click this link for ipx1031's explanation of this new strategy. http://ipx1031.com/pdf/DoVacation&SecondHomesQualify.pdf

Qualified Exchange Intermediaries.

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§1031 tax deferred exchanges can be a very complicated process. It is always required that those considering this as an option consult their CPA, tax-attorney and/or reputable qualified exchange intermediary prior to the sale of your property. Here are a few qualified exchange intermediaries.

http://ipx1031.com/ Investment Property Exchange Services, Inc. IPX1031

http://www.orexco1031.com/ Old Republic Exchange Facilitator Company OREXCO

For assistance with the sale of your property and possible tax deferred exchange transactions, please contact us. We have the experience, education, technology and strategies to help you with your real estate transactions.

Naomi Toyooka R
(808)227-1479
Naomi.Toyooka@EastOahu.com
Website

Rick Nakama RA
(808)382-6761
RickNakama@Gmail.com

OREXCO Vacation Home Announcement Email

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VOL. 6, ISSUE 2Compliments of
Julie Tumbaga
Vice President, Hawaii Regional Manager
(877) 591-1031 Toll-Free
(808) 524-6737 Direct
(808) 528-3837 Fax
jtumbaga@orexco1031.com

Finally — IRS Guidance on Exchanging Vacation Homes Revenue Procedure 2008-16 Provides Safe Harbor

Until now, the issue of whether a vacation home qualifies for tax deferral treatment under IRC §1031 was the subject of much scrutiny and uncertainty. To the delight of many tax practitioners, on February 15, 2008, the IRS eliminated that uncertainty by issuing Revenue Procedure ("Rev. Proc.") 2008-16, effective March 10, 2008, which provides a safe harbor for exchanges of vacation homes (defined as "dwelling unit" in the Rev. Proc.). Now taxpayers can have a clear understanding of the circumstances under which the IRS will not challenge whether a vacation home will qualify as property "held for investment" under §1031.
Vacation Home as Relinquished Property
For a vacation home to qualify as relinquished property, it must meet the following criteria:
• It is owned by the taxpayer for at least 24 months immediately before the exchange ("qualifying use period"); and
• Within the qualifying use period, in each of the two 12 month periods, (1) the taxpayer rents the dwelling unit at fair rental to another person for 14 days or more and (2) the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12 month period that the dwelling unit was rented at fair rental value.
The first 12 month period immediately preceding the exchange ends on the day before the exchange takes place (and begins 12 months prior to that day). The second 12 month period ends on the day before the first 12 month period begins (and begins 12 months prior to that day).
Vacation Home as Replacement Property
For a vacation home to qualify as replacement property, it must meet the following criteria:
• It is owned by the taxpayer for at least 24 months immediately following the exchange ("qualifying use period"); and
• Within the qualifying use period, in each of the two 12 month periods, (1) the taxpayer rents the dwelling unit to another person at fair rental for 14 days or more and (2) the taxpayer’s personal use of the dwelling unit does not exceed the greater of 14 days or 10 percent of the number of days during the 12 month period that the dwelling unit was rented at fair rental.
The 12 month period immediately after the exchange begins on the day after the exchange takes place and the second 12 month period begins on the day after the first 12 month period ends.
Personal use is defined broadly. Use by the taxpayer or other person having an interest in the dwelling unit and any family member1 will be considered "personal use" by the taxpayer. Also, any arrangement whereby fair market rent is not paid will be considered "personal use" by the taxpayer. Notwithstanding the foregoing, use by family members will not be considered "personal use" by the taxpayer only if the dwelling unit is rented at fair market rent and the family member uses it as his principal residence.
Fair rental is based upon all of the facts and circumstances that exist when the rental agreement is entered into. All rights and obligations of the rental agreement are taken into account.
Note special rule for replacement property. If the taxpayer files a return reporting a transaction under §1031 based on the expectation that the dwelling unit will meet the qualifying use standards and subsequently determines that the dwelling unit does not meet the qualifying use standards, the taxpayer, if necessary, should file an amended return.
Exchanges of vacation homes outside the Rev. Proc. 2008-16 safe harbor. An exchange of a vacation home may still qualify under §1031 even though it falls outside the parameters of Rev. Proc. 2008-16. Any such circumstance will be subject to greater scrutiny and therefore should be carefully planned and reviewed by the taxpayer’s tax advisor.
1 Brothers and sisters (by the whole or half blood), spouses, ancestors, and lineal descendants.

Old Republic Exchange Facilitator Company
733 Bishop Street, Suite 2700 • Honolulu, HI 96813
www.orexco1031.com

FAQs Common Questions on §1031 Topics.

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OREXCO's Frequently Asked Questions Page <-- Link

IPX1031's Topic Explanations Page <-- Link

Contact Naomi Toyooka R (808)227-1479

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Naomi Toyooka
REALTOR CRS GRI
(808)227-1479
Naomi.Toyooka@EastOahu.com
Full Biography

Picture Diagram of Basic 1031 Exchange Possibilites.

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Click for full size image!

Click for full size image!