Using 1031 Exchange Property as a Vacation Home

Section 1031 of the Internal Revenue Code allows taxpayers to exchange property held for productive use in a trade or business or for investment (hereinafter referred to as “qualified use”) for like-kind property on a tax-deferred basis. Deferred taxes means more funds to put toward replacement property(ies). You may even be able to afford to buy a replacement property in a desirable vacation area—and may be tempted to convert the property to personal use. A pure vacation home or personal residence will not meet the qualified use requirements, however, the IRS does allow some limited personal use of 1031 exchange property.

The IRS provides a two-year safe harbor in Rev Proc. 2008-16, under which replacement property will qualify as “held for productive use in a trade or business or for investment.” The requirements are as follows:

  1. The property must be owned by the taxpayer for at least 24 months immediately after the exchange, and
  2. For each of the two twelve-month periods immediately after the exchange:
    1. The taxpayer must rent the property to another person at a fair rental for 14 days or more, and
    2. The taxpayer must limit personal use of the property to the greater of: i) 14 days or ii) 10% of the number of days during the twelve-month period that the dwelling is rented at a fair rental. Personal use includes personal use by family members, renting the property for less than fair market value, and vacation home swap arrangements.

In other words, if you qualify under the safe harbor, you can use the property for up to 14 days of vacation (or other personal use) per year for the first two years. Similar rules apply for using “relinquished property” for personal use prior to an exchange. At the end of the two-year safe-harbor period, you should be able to convert the property to personal use without fear of invalidating the previous exchange under the qualified use rule. This assumes that the exchange does not run afoul of other 1031 exchange requirements. You should engage a qualified tax attorney to review your exchange before converting the property to personal use.

Outside of the safe harbor, the question of whether property is held for qualified use is a factual question of the taxpayer’s intent at the time of the exchange. An exchange not meeting the requirements above could still potentially qualify for tax deferral, however, such an exchange would incur a heightened risk of IRS audit. If possible, it is always recommended that exchangers comply with the safe harbor.

The foregoing is intended for informational purposes only, and is not to be used or disseminated as tax advice. The risks in any 1031 exchange will depend on the facts and circumstances of the exchanger. If you are considering a 1031 exchange, you should engage a qualified tax attorney to navigate the many complexities contained in the Code and IRS and Court rulings.

What is Probate in California?

Sitting down and having a discussion about what will happen to your assets and finances after you pass away is certainly not an easy thing to do, but it’s something that should be done. You should start your estate planning as early as your graduation from college, and especially once you’re married with children.

When you pass away, most likely your estate will pass through the probate process. This process is the official way your estate is settled through the supervision of probate in California. The estate is frozen until the court determines the Will is valid, all relatives have been notified and that all of the property in the estate is identified. The court will also ensure that creditors and taxes are paid. Once that is all done, an Order is issued by the court for the distribution of the remaining assets. If you die without a will, the court will determine who is appointed as the administrator of the estate and will determine who receives your assets based on a “family tree” of surviving relatives.

Not All Property is Subject to Probate in California

Not all of your property will go through this process. You may have accounts or insurance policies that already list beneficiaries, and in those instances, the assets pass directly to those beneficiaries. If you have a property that you own jointly, the property also passes to the joint owners immediately upon your death.

The Probate Process

Once a descendant has passed away, the Will is filed with the court, along with a petition. Notice will be given to all beneficiaries and heirs, and a notice is published in the paper regarding the proceeding.

From there, Letters Testamentary is issued to the executor of the estate and that gives that individual the legal authority to act on behalf of your estate. The executor must collect an inventory of your assets and file that inventory with the court. The court then issues an order to distribute the assets once all bills are paid.

Contact Lowthorp Richards if you need more information regarding estate planning or probate in California.

What is Estate Planning?

Planning for distribution of an estate following death is commonly considered a legal process that is only necessary for wealthy individuals, but the truth is that everyone has a need for some form of estate planning. Every young person with children needs an established will and directive regarding disbursement of personal property and dependent children guardianship in the event of an untimely tragedy. Even possessions as simple as furniture or vehicles are considerations when evaluating what would happen in the event of death or incapacity. Incapacity is another issue that many do not consider either, which can be especially important for young single parents. Everyone needs some form of an estate plan, regardless of the total value of their personal holdings, because passing away intestate can produce results that no one may want. The answer is developing a comprehensive legal directive, usually done most effectively with the counsel of an experienced estate planning attorney such as Lowthorp Richards.

What is in an Estate Plan?

All through estate directives will include the naming of a power of attorney in the event the will maker becomes incapacitated. Sometimes unfortunate events lead to the primary party being incapable of conducting their own personal business and someone must be appointed the durable power of attorney. While most states transfer this power automatically to the spouse, it still takes a directive for some forms or representation. An administrator to the estate should also be named beforehand, as well as who the primary will maker wants to serve as guardian of any minor children. Beyond personal situational wishes, estate planning will also include a structure for distribution of assets per the wishes of the decedent.

Avoiding Probate

Many estate plans will also include a financial structure that protects as much personal property as possible from creditors and government tax agencies, often achieved through established irrevocable trusts. Everyone will have their estate scheduled for Probate following death and establishing trusts or making a complete transfer of specific property can exclude the assets from the probate process that normally distributes property solely according to state law, which often results in compliance with the wishes of no one except estate creditors. The only property that is recognized by the state as being owned by the decedent is available for attachment.

Anyone in the Oxnard, California area with estate planning needs should contact the Lowthorp Richards Law Firm for a full evaluation.

Beware of These Pitfalls When Selling Property in a 1031 Exchange

Looking to trade in an old investment property for something new? Section 1031 of the Internal Revenue Code allows taxpayers to defer the recognition of gain on business or investment property exchanged for like-kind property. Although this seems simple on its face, below are several common pitfalls.

  • Failure to properly use a qualified intermediary (also referred to as an exchange facilitator)

The word “exchange” is applied quite literally in Section 1031. You must exchange the old property directly for the new property, without receipt of any sale proceeds. Because the odds of finding someone who is willing to swap properties is incredibly low, most people must use a qualified intermediary to comply with the “exchange” requirement of Section 1031. The funds from the sale of the relinquished property are paid directly to the qualified intermediary, who uses the funds to acquire the replacement property. The qualified intermediary also handles the exchange of title with the buyer of the relinquished property and the seller of the replacement property. You may need to come up with separate liquid funds or financing if the replacement property is more expensive than the net proceeds from the sale of the relinquished property. (more…)

Top Five Estate Planning Items You Shouldn’t Ignore

1. Estate Tax and Gift Tax Exclusion Amounts for 2016

The estate and gift tax exemption amount is presently $5.4 million for 2016 and the annual exclusion for gifts is $14,000.00.

What does this mean? It means that an individual can leave up to $5.4 million to heirs and not pay estate tax. Married couples then can leave up to $10.8 million. You can also make tax-free gifts during your lifetime (but you need to keep track of them) up to $14,000 per year per person with a lifetime total gift exemption of $5.4 million. (more…)

Estate Planning Tips For Modern Families

Estate planning can be a difficult topic for families to discuss. However, good communication can help ensure that family members know what to expect, and this reduces the likelihood that the estate plan will face a challenge. It will also help to ensure that your plans are understood. (more…)

Baby Boomers Looking at Retirement – Business Succession Plans Crucial

It has been commented that working for oneself is great because you get to work half-days. You even get to choose which half – the first 12 hours or the second. Funny as that may seem, Baby Boomer generation business owners smile knowingly, and the thought of retirement is alluring. Logistically, however, said Boomers might find themselves in a pickle when it comes to business succession, unless they focus now on some forward-thinking. (more…)

10 Things You Should Know About Probate

1. Death of a Loved One

Following the death of a loved one, such as a parent, the first and foremost priority is “family.” Nothing should precede that. The business of the estate comes after devoting full attention to remembering your dearly departed, being with friends and family, and allowing friends and family to pay their final respects. Everything else is on hold. The liabilities of the estate will wait for now. If there is a mortgage on the house, it can go late for now. Fortunately, credit scores for the decedent, are now meaningless. Just collect and organize the mail, but focus for now on family. In fact, the business of administering the estate can remain on hold until you receive the certificate of death from the funeral service or office of vital records. Your receipt of the death certificate will prompt you to begin administering the estate. (more…)