I received this email a few days ago from the 1031 exchange company I like. The article below describes some situations where people tried to do a 1031 exchange and turn it into there personal residence incorrectly and because of that not only had to pay the taxes but penalties in addition.

Doing it correctly can be a powerful way of getting some of your money out of your properties tax free but not without risk or planning. If memory serves me right (consult with these guys for professional advice) the property needs to be rented for 3 years before you move in. In addition there are other requirements involved and maybe Vince and Ryan can shed some light on those requirements.

Let’s just play this out and say you got all your ducks in a row you could potentially exchange into a single family home you wouldn’t mind living in, rent it out for the appropriate amount of time and get $250,000 if you are single and $500,000 tax free if you are married by moving in for 2  years in a 5 year period.

I know quite a few people who have done this successfully and moved into there dream retirement home in San Diego using this method. Consider looking into it if you have an apartment building or other piece of real estate you would like to sell but don’t want to pay the taxes.


Goolsby v. Commissioner (April 1, 2010); T.C. Memo. 2010-64

How Soon After a Taxpayer acquires property through a 1031 exchange can the Taxpayer treat the property as a personal residence?

The Tax Court recently held that property acquired by taxpayers in a Section 1031 exchange did not qualify as replacement property when the taxpayers moved into the property two months after acquiring it.  Taxpayers were also held liable for the accuracy-related penalty.

In October 2002 taxpayers signed a purchase agreement to acquire a single family property in Georgia (the Pebble Beach property). The purchase agreement was contingent upon sale of taxpayers’ personal residence in California. In February 2003 taxpayers sold their principal residence in California and began living with their in-laws in Georgia. In March 2003 taxpayers sold rental property located in California and used a QI to structure an exchange. Taxpayers purchased the Pebble Beach property as replacement property.

The court ruled that taxpayers did not intend to hold the Pebble Beach property for productive use in a trade or business or for investment at the time of exchange, and therefore it was not valid replacement property. The court first noted that taxpayers moved into the Pebble Beach property two months after acquiring it. Further, they did not move into it temporarily until renters could be found. Their efforts to rent the Pebble Beach property were minimal. They merely placed an advertisement in a neighborhood newspaper for a few months, and no further efforts were made to gain more exposure for the Pebble Beach property. Moreover, taxpayers began preparations to finish the basement of the Pebble Beach property, having a builder obtain permits for construction, within two weeks of purchase.

The court surmised that taxpayers were contemplating use of the Pebble Beach property as a personal residence before the exchange. It noted that taxpayers made purchase of the Pebble Beach property contingent upon sale of their personal residence in California. They sought advice from the QI regarding whether they could move into the property if renters could not be found.   Taxpayers did not research whether covenants of the homeowners association would allow for rental of the Pebble Beach property before the exchange. They also did not research rental opportunities in the area prior to the exchange.

Taxpayers contended that purchase of the Pebble Beach property was not extravagant when compared to costs of California properties. The court responded that the relative values of properties were irrelevant. Taxpayers also argued, as evidence of their intent not to reside at the Pebble Beach property that they lived with their in-laws upon their move to Georgia.  The court dismissed this argument as non-persuasive.

The court also found the taxpayers liable for the accuracy related penalty due to a substantial understatement of tax.  Taxpayers failed to present any evidence that they acted with reasonable cause and in good faith.  The taxpayers did not use counsel and represented themselves.

This case highlights that taxpayers should not be too quick to move into property acquired in an exchange. They should make substantial efforts to rent the property and avoid evidence of intent to use it as a residence.   The taxpayers asked the QI if they could move into the property if renters could not be found.  You probably get this or similar questions from clients frequently.  Be careful with your answers and let the client know about the fate of the Goolsbys.

If you have ANY 1031 Exchange inquiries, or questions relating to the above article, please contact our offices.  Pacific Capital Exchange looks forward to meeting ALL YOUR 1031 EXCHANGE NEEDS!  Call us today at 1-888-398-1031 or visit our website at www.pcx1031.com.



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Ryan S. Auer, CES

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Pacific Capital Exchange Services

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What you need to know about Property Taxes & Appeals

You regularly pay your property taxes but you are not completely sure about how they work. In this article we answer some of the common questions most folk have regarding property taxes in San Diego County.
First off many people are finding that their property valuation is higher than earlier while on the other hand the real estate market is pretty much in the doldrums. This is possible because your property valuation is done vis a vis the value of your property when you bought it. Therefore if the current value of your property is higher than when you bought it, your property is likely to be eligible for an increase in assessment.

Another reason your taxes may be increasing is because the tax is not pegged to your property but to the consumer price index. The consumer price index is a metric which measures the overall change in the cost of living. The good news is that the increase of taxes is capped at 2%. The bad news is that there have only been three years when the increase of the consumer price index has been less than 2%.

People are commonly finding that currently the property assessment shows a value than what may be greater than the current property value. This may be the case but it doesn’t necessarily mean that you will automatically be eligible for an appeal. You will have to ensure that the value of your property as on the first day of the calendar year i.e. 1st January is what is being used for assessment purposes, and not any period thereafter.

If you still find that you are eligible for an appeal you have till 30th November to do so. In case you do appeal keep in mind that due to the current market scenario, there are more than 40,000 appeals filed this year which is 10 times the normal number of appeals made in any year. However, there is a two year time limit for a decision on your appeal.

You may also find that you had appealed your property tax assessment and won the appeal but are still being taxed on the old amount. This is most probably the case if you had appealed after July 1st. This is happening because it takes time for the system to be updated and it is best if you just pay on the basis of the old amount and you will be paid a refund in the first part of next quarter.

Before we get further into appeals you should know that the real deadline for payment of your property taxes is Dec 10th. Any delay after that and you straight away face a fine of $10 and 10% for every quarter that you are late. That doesn’t mean if you rush to pay your tax bill in end December you save on the penalty; you will still be fined the full 10% plus $10. After a delay of 2 such quarters (i.e. July 1st) you will be fined 1.5% of the unpaid tax amount per month.

In case you are looking for a payment plan we are sorry to tell you that there is none. In every circumstance you must pay your first installment by December 10th and your second installment by July 10th. The only people who are waived from these deadlines are active-duty members of the military who are serving abroad.

So if you do find that you are eligible for an appeal then you can do so by December 1st at 1600 Pacific Highway, Room 402 in San Diego. Alternatively you can make an informal appeal between March 1st and May 30th by filing a written request. The result of this informal request can not be appealed but it must be reviewed by July 1st which is that start of the next fiscal year.

In order to support your appeal you should have comparable property sales data of your area. Alternatively, you can have completed a recent appraisal. The comparable property sales data should be from November of the last year to March of the current year. Such data can be acquired from your real estate agent, websites or the county assessor’s website.

You should know that most of the time even if the original appeal is rejected, a compromise is sought with the property owner. You can also file fresh appeals every year as long as your property value continues to fall.

Finally, you should know that there are plenty of companies that offer to file your appeal for a fee. It’s best to actually do this process yourself as it is not complicated and there are a lot of scams like this in the market.

Good Luck!

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