Question

A couple bought a two family house in 1998 for $100,000, the house is now worth and valued at $850,000. The house sold for $800,000 leaving a gain of $700,000. Following the 1031 Exchange, the couple would get back their original 1998 investment of $100,000 tax-free. With the 1031 Exchange, the couple needs to purchase a secondary home to replace their original 1998 investment at the equal or greater amount of $100,000. If the couple buys a replacement secondary home for $100,000, (after closing costs of $30,000 leaving a net gain of $670,000 ($700,000-$30,000)) would be sent to a qualified intermediary. The couples accountant says that as long as the replacement secondary home is rented out for a year, the qualified intermediary holds the net gain of the sale for a year, the couple will avoid capital costs. Is the couples accountant correct or incorrect? Would the couple have to find a replacement home at the equal or greater value of their original 1998 $100,000 investment or would the replacement secondary home have to be at the equal or greater value of the net gain of $670,000?

Answer 1