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Subject Author Date
1031 Question Paul Thomas, CPA 12-13-2006
|--> Re: 1031 Question Stuart A. Brons...12-15-2006
`--> Re: 1031 Question Gary Pomeroy, E...12-20-2006
Posted by Paul Thomas, CPA on December 13, 2006, 10:00 pm
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 Client is pondering a 1031 exchange from business/investment
property to a B&B where he intends to, and is actually
required by law, to reside in a portion of the property
while operating the B&B. I'm comfortable with the 1031
exchange on the B&B in general, but we should carve out the
% of the house that is personal in nature (their living
quarters) as not treat that as part of the 1031. Does this
type of use otherwise void the 1031 exchange in any manner
on the rest of the property?

I'm going to try to hunt down my 1031 expert, but they're
out of town till next week and I'd like to get a firmer
handle on it before then if possible.

Any thoughts, pointers, pitfalls that anyone would like to
share?

--
Paul Thomas, CPA
paulthomascpapc@bellsouth.net

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Posted by Stuart A. Bronstein on December 15, 2006, 9:38 am
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> Client is pondering a 1031 exchange from business/investment
> property to a B&B where he intends to, and is actually
> required by law, to reside in a portion of the property
> while operating the B&B. I'm comfortable with the 1031
> exchange on the B&B in general, but we should carve out the
> % of the house that is personal in nature (their living
> quarters) as not treat that as part of the 1031. Does this
> type of use otherwise void the 1031 exchange in any manner
> on the rest of the property?

Section 1031(b) says,

"if it were not for the fact that the property received in
exchange consists not only of property permitted by such
provisions to be received without the recognition of gain,
but also of other property or money, then the gain, if any,
to the recipient shall be recognized, but in an amount not
in excess of the sum of such money and the fair market value
of such other property."

Since your transaction includes not only property "permitted
... to be received" and also "other property" it's pretty
clear to me that it should still qualify.

My question is whether 100% would qualify. If he's required
by law to be a resident manager then he still holds the
entire thing for "productive use in a trade or business or
for investment". The rule used to be at least that if he
were an employee and he lived there under those
circumstances the value of his rent would be tax free since
he'd be there for the convenience of his employer.

So I think he'd have an argument that he wouldn't have to
recognize anything at the moment. But I haven't researched
the topic, either.

Stu

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

Posted by Gary Pomeroy, EA on December 20, 2006, 1:07 am
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> Client is pondering a 1031 exchange from business/investment
> property to a B&B where he intends to, and is actually
> required by law, to reside in a portion of the property
> while operating the B&B. I'm comfortable with the 1031
> exchange on the B&B in general, but we should carve out the
> % of the house that is personal in nature (their living
> quarters) as not treat that as part of the 1031. Does this
> type of use otherwise void the 1031 exchange in any manner
> on the rest of the property?
>
> I'm going to try to hunt down my 1031 expert, but they're
> out of town till next week and I'd like to get a firmer
> handle on it before then if possible.
>
> Any thoughts, pointers, pitfalls that anyone would like to
> share?

It should not invalidate the exchange, but any part of the
B&B that is not treated as being "used for business" under
IRC 280A would have to be treated as boot in the exchange.
This means only the areas used "regularly and exclusively"
could qualify. The guest rooms should not be a problem. An
office used for administrative tasks could qualify. A guest
bathroom, dining room or sitting room could also qualify --
if they are not used by the owners. Furthermore, the
kitchen, pantry, laundry room and most of the hallways would
not qualify as they are used by the owners for both business
as well as personal purposes and fail the exclusive use
test.

You may want to look at the MSSP on B&B's to see the IRS'
view of what constitutes "business use." It seems to be
missing from the IRS website, but it can be found here:

http://www.unclefed.com/SurviveIRS/MSSP/b&b.pdf

Gary Pomeroy, EA

<< ======================================================= >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
<< Copyright (2006) - All rights reserved. >>
<< ======================================================= >>

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