[KY] Can a business use a 1031 exchange to defer taxes on a property it built to sell?

KY Tax

Liz

46,810 satisfied customers

View context

Solved

The Internal Revenue Code Section 1031 allows for the deferral of capital gains taxes on the exchange of like kind properties held for productive use in a trade or business or for investment. However, properties held primarily for sale, such as those developed and sold by a business, typically do not qualify for a 1031 exchange. This is because the IRS considers these properties as inventory rather than investment properties. This exclusion is set out directly in the statute at 26 U.S.C. § 1031(a)(2), which specifically bars property "held primarily for sale" from qualifying, and is further addressed in the Treasury regulations at 26 CFR § 1.1031(a)-1.

Additionally, the holding period of the property is a critical factor. The IRS does not specify a minimum holding period, but properties held for less than a year are often scrutinized more closely to determine if they were truly held for investment purposes. It's usually recommended for the 1031, that it be held at least a year and a day. The exchange is most commonly seen with things like selling one rental property to acquire another that you will then rent long term.

Full Conversation

My S corp LLC has built a house from the ground up to sell. We have $225,000 in the house, and have an offer for $275,000. What are the stipulations with doing a 1301 exchange to reinvest this into a similar build? I have no idea what a 1301 is.

Lexi, Chatbot

I understand that navigating a 1301 exchange can be quite complex, especially when it involves significant investments like your house. Have you already identified a property for reinvestment, or are you still in the process of looking?

Yes, we have other properties in this subdivision we could reinvest in decently quick.

Lexi, Chatbot

Are you familiar with the timeline and requirements associated with a 1301 exchange, such as the identification period and closing deadlines?

I am not.

Lexi, Chatbot

Is there anything else the Real Estate Lawyer should know before I connect you? Rest assured they'll be able to help with your 1301 exchange.

Other than possibly that we are in the state of Kentucky, it is an S Corp LLC partnership.

Liz

Hi there! Welcome to our service. My name is Liz and I've been an attorney for more than a decade, and I am here to assist with your legal concerns. Just so you are aware, our service is a legal information only site. No attorney-client relationship is formed from our conversation. So I can best help, the home under your LLC is an investment property only?

Yes, I think that would be the correct terminology. It is 100% in our LLC's name, and we built it from the ground up to put on the market.

Liz

To be clear, you bought it to hold for sale?

We bought the property that the house is on from someone that was developing a new subdivision. We had full intentions of building a house on it to sell, which is at the point we are now. So to start from the beginning, raw land was purchased in this subdivision through our LLC, we built the home to our specifications, and then put it on the market to sell.

Liz

Got it, thanks for explaining that. With buying another house, you would be doing the same thing, or would it be for rent? With a 1031, the property has to be held for investment, not held just for sale.

Yes, we would be reinvesting that money into another property to build a house on to sell.

Liz

How long do you hold each property?

The one we are selling now, and the one I'm discussing with you, was our first build, and we have had it for less than a year. However, we would always strive to sell as quickly as possible and never want to hold it for more than a year. This is all a bit of a learning curve.

Liz

Liz

Does that make sense?

Yes, that does make sense. So what would you recommend my and our course of action be with this? Selling it and setting aside the proper amount to pay the taxes associated with selling this property, or going forward with a 1301 and reinvest it?

I want the best possible outcome with the less legal ramifications if something went south.

Liz

With a 1031, for what you are intending, it usually doesn't meet the standard. So capital gains would usually have to be paid as is due.

Understood, thanks for your help.

Liz

You're very welcome.

Liz

46,810 satisfied customers

Welcome! Have a similar question?

By messaging AskALawyer, you agree to our Terms and Privacy Policy.

Jessica B

Attorney

4.72 (32,347)

[NY] What should you do if the IRS threatens to revoke your driver’s license over unpaid taxes?

Answered 3 days ago

Dan

Law Partner

4.53 (30,625)

[CA] How can a part-year resident dispute a state tax lien notice for unpaid taxes?

Answered 2 months ago

Ray

Lawyer

4.72 (67,238)

[VA] Can the Social Security Administration collect a waived SSI overpayment and intercept tax refunds?

Answered 2 months ago

Disclaimer

By messaging AskaLawyer.com, you agree to our Terms and have read our Privacy Policy.

The information provided on AskaLawyer.com is for general informational purposes only and does not constitute legal advice. While we strive to ensure the accuracy and timeliness of the information presented, we make no guarantees regarding its completeness or applicability to your specific circumstances.

Use of this website does not create an attorney-client relationship between you and AskaLawyer.com or any of its attorneys. Communications through this website, including any responses from attorneys, are not privileged or confidential. For advice tailored to your individual situation, we recommend consulting a licensed attorney in your jurisdiction.

AskaLawyer.com disclaims any liability for actions taken or not taken based on the content of this site. We are not responsible for any third-party content that may be accessed through this website. Reliance on any information provided herein is solely at your own risk.