Posted by J.Hyre in Ohio on November 05, 1998 at 11:01:18:
Usually when you sell property, you pay tax on any appreciation. A 1031 Exchange, aka Like-Kind Exchange, is different. Under Section 1031 of the Internal Revenue Code, if you exchange property for like-kind property, you defer taxes until when you sell the property received.
For example: If you owned 30 single family homes currently worth $650,000 and purchased them for $300,000 ten years ago, you could either sell the homes & pay taxes of $61,000 to $150,000 on the $350,000 gain OR exchange the houses for other real property like a plot of land or an easy-to-manage building. The exchange would be tax-free and you would pay no taxes until you sold the plot or the building.
I have a commercial property that I’m thinking about lease optioning. Are there any nuances about lease optioning commercial properties that differ from residential that I should know about. Also the upstairs of this property has been my home for the last year. If I lease option it, and still list it as my primary residence for another year, at the time of the sale (say 3 years from now), can I eliminate the capital gains tax (2 year primary residence exclusion)? And does the rent paid up until that point count towards the total capital gains. Thanks for any and all help.
I would expect that you were depreciating the commercial portion and are speaking of capital gains(3 of last five yr req) only on your residential portion. I’ve never L/O commercial property but can’t think of any differences. I would structure it so that you get as much option payment as possible on the residendial side. I would expect that if you treat the former residence as rental property for more than the two years the IRS could disallow the exclusion. If it is enough more to worry about check with your tax advisor. Then there is always the 1031 approach.