DEAR BOB: In 2001, my wife and I moved into our new home.Since then, my previous home, which I still own, has remained vacant andun-rented. I now want to sell it and transfer the sale proceeds into anotherhome and place it on the rental market. Must I rent my former personalresidence before I can sell it? Or, can I sell it now and meet the rules for anInternal Revenue Code 1031 tax-deferred exchange? If not, how long must I rentit to qualify for a tax-deferred exchange to avoid capital gain tax? –RobertA.
DEAR ROBERT: To qualify for an Internal Revenue Code 1031tax-deferred exchange, both the old and acquired properties must be held forinvestment and/or use in a trade or business. A vacant house doesn’t fall intoeither category.
Purchase Bob Bruss reports online.
Although IRC 1031 doesn’t specify a minimum rental time,most tax advisers suggest renting a property at least six to 12 months beforeselling it as part of a tax-deferred IRC 1031(a)(3) “Starkerexchange.”
That means you can sell your old rental property, have thesales proceeds held by a third-party intermediary beyond your”constructive receipt,” and then use that money to acquire areplacement rental or business property of equal or greater cost and netequity.
You must designate the replacement property within 45 daysof selling the old rental property and complete the acquisition within 180days. Of course, you must trade equal or up in both price and net equity. Formore details, please consult your personal tax adviser.
WHEN NEGOTIATING WITH CUSTOM HOME BUILDER, YOU NEED A REALESTATE ATTORNEY
DEAR BOB: I have purchased land and plan to build a customhome. Beyond interviewing and researching the backgrounds of several localgeneral contractors, they have presented me with their contracts ranging from afirm fixed price to cost plus with a 15 percent fee. Is there a source of”boiler plate” contracts that are balanced between the contractor andthe homeowner? –Frank C.
DEAR FRANK: Please consult a local real estate attorney whohas experience with custom-home construction contracts. This is not ado-it-yourself project.
The contractors have the advantage over you. You need anattorney to point out the pros and cons of their proposed contracts and thenprepare a contract that is acceptable to both you and the contractor.
DON’T PUT ALL YOUR (CASH) EGGS IN ONE (HOME) BASKET
DEAR BOB: I recently came into a significant inheritance. Itwill enable me to buy my first home. But a friend showed me a recent articlewhere you said not to pay all cash for a house or condo just in case it turnsout to be a “lemon.” This inheritance is all I have so I can’t affordto be careless. How much of it should I use for a down payment? –Agnes H.
DEAR AGNES: Just in case you buy a “bad house” ora “bad condo,” I don’t want you to have paid all in cash and discoveryou were a sucker and are stuck with an unsaleable property.
Instead, make a modest 20 percent or 25 percent cash downpayment, and obtain a 75 percent or 80 percent first mortgage. If all goeswell, and after a few years you are satisfied with your home purchase, then youcan pay off the mortgage. Just be sure there is no prepayment penalty in themortgage you obtain.
The new Robert Bruss special report, “The 20 EssentialQuestions Smart Home Buyers Must Ask to Avoid Overpaying in a Buyer’sMarket,” 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 delivery atwww.BobBruss.com. Questions for thiscolumn are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News