02 Jun Can we use this tax break to buy a rental property in Florida?
Q. We own three rental properties here in New Jersey that are being depreciated accordingly. We are thinking about purchasing a place in Florida, keeping our primary home in New Jersey for now. What do we need to do to set up a 1031 exchange with one or more of these properties depending on what we find.
— Thinking about it
A. We’re glad you asked because Section 1031 exchanges can be complex and nuanced.
Named for its IRS code, a 1031 exchange is basically a swap of one investment property for another in which you’re allowed to defer capital gains taxes.
You can exchange the multiple investment properties in New Jersey for an investment property in Florida, said Ken Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.
He said the key is that the new property must meet the definition of an investment property rather than a personal residence.
There are many different rules around intent and timing when exchanging into a new property, Van Leeuwen said.
“Generally, the IRS wants to see that your intent was for this new property to be an investment property,” he said. “This means you cannot move into the home right after the exchange, even if it is temporary.”
Make sure the rent charged is at fair market value, and not at an elevated price to discourage rentals, he said.
There are also rules around timing of the rentals and personal use.
“If you rent the property for more than 15 days a year, then you can qualify this property as an investment as long as you can establish that the intent of the property is rental income,” Van Leeuwen said. “This could be difficult to prove if you are using the property personally.”
He recommends you work with experienced financial professionals and real estate professionals to help guide you through some of the more detailed nuances of the exchange.
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This story was originally published on June 2, 2020.
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