Land investment opinions sought

[MariaAZ]

DH and I would like to move when he retires in 7 years. We are contemplating doing a 1031 exchange with one of our properties, that should sell for $60-80K. So, we would be looking to spend this amount for property that has to be classified as income producing.

I've been looking at timber land, but am not sure it meets our long term goals. We found one property where most of the acreage was being leased for hay, and a house that could be offered for rent. However, I'm not sure something like this is really feasable or even adviseable. I've also read about leasing land for crop production. I'm sure there are other ideas out there.

I'd love to hear opinions/ideas on what we could look for.

[KCM]

Originally Posted by MariaAZ

DH and I would like to move when he retires in 7 years. We are contemplating doing a 1031 exchange with one of our properties, that should sell for $60-80K. So, we would be looking to spend this amount for property that has to be classified as income producing.

I've been looking at timber land, but am not sure it meets our long term goals. We found one property where most of the acreage was being leased for hay, and a house that could be offered for rent. However, I'm not sure something like this is really feasable or even adviseable. I've also read about leasing land for crop production. I'm sure there are other ideas out there.

I'd love to hear opinions/ideas on what we could look for.

Have you considered buying or building one of the rental storage businesses?

[RedHogs]

We are in the RE business and turn over our land every couple of years as we develop it....under the current tax rates a 1031 would be a very bad idea....Talk to a good CPA(not a financial advisor) first

i think you have gotten bad info.

[agmantoo]

REDHOGS
Why would a 1031 be a bad idea? Please elaborate.

[ET1 SS]

"Like kind" comes to mind.

The property that you are selling must be of the same like and kind as what you are buying.

When going before an auditor, we have felt comfortable in saying that we sold one MFR property and used the money to invest into another MFR property. We have done this even when we were not using the money to actually purchase property. Since the time window is a plus or minus kind of thing.

Money from the sell of an apartment building, going into another apartment building.

To take money from the sale of an apartment building and use it to purchase a woodlot, is IMHO not really 'like kind'. Both may be income properties, however they are entirely different kinds of income properties.

We have done it with a property that had three houses and twenty acres of vineyard. As far as the IRS cared it was still a MFR.

Read the pub yourself, and if it fits the rule in your mind, then you are set. When sitting before an auditor, he is going to ask you to explain what you did. So long as you have a full understanding and the IRS pub open to read to him the phrase that you were following; then your stance is firm and you will be fine.

But again In My Humble Opinion, going from a Single-Family-Rental and rolling it over into a woodlot, is not really "like kind".

[MariaAZ]

I found this on the IRS website (www.irs.gov) under "Like-Kind Exchanges - Real Estate Tax Tips"

Like-Kind Property

Properties are of like-kind, if they are of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. However, livestock of different sexes are not like-kind properties. Also, personal property used predominantly in the United States and personal property used predominantly outside the United States are not like-kind properties.

Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties.

Maybe I am misreading this, but it seems to me like-kind means exchanges of the same thing. So, I can exchange my Hereford bulls for Angus bulls, but I can't exchange my rental property for Angus bulls. If I'm correct, real property means land and all property permanantly fixed on that land. The last paragraph would SEEM to indicate that I can exchange any type of real property for any other type of real property as long as it's in the US. Of course I will DEFINITELY confirm with my accountant though, that is always good advice to follow.

Edited to add:

Originally Posted by ET1 SS

We have done it with a property that had three houses and twenty acres of vineyard. As far as the IRS cared it was still a MFR.

This is the kind of thing I would be interested in doing

[ET1 SS]

That is how I understand it.

[agmantoo]

Your are not understanding the like kind. Get yourself a guide to 1031's from Orexco. I have done lots of 1031s and I assure you those are my favorite numbers. here is an excerpt......raw land held for investment may be exchanged for single-family rentals used for a trade or business or any combination of the following:

* Single Family Rentals
* Farms/Ranches
* Office/Commercial
* Motels/Hotels
* Golf Courses
* Some Recreational Properties
* Multi Family Rentals
* Raw Land
* Retail/Industrial
* Leasehold Interest of 30 years or more
These people will not let you make an error and they will hand hold you through a transaction. They are also very competitive with their fees. http://www.orexco1031.com/
One of my more recent exchanges was a mobile home rental lot for 66 acres of loblolly pines. Both are income producing and that qualifies for like kind.

[MariaAZ]

Originally Posted by agmantoo

Your are not understanding the like kind.

Now I'm REALLY confused... I was thinking that real estate is a "kind" and that all are alike. So, I can exchange my residential rental for another type of real estate (since all real estate is alike) but I CAN'T exchange for personal property.

Tax law.. gotta love it

[agmantoo]

Income producing for income producing is LIKE KIND

[agmantoo]

I do not understand where RedHogs is coming from. Why pay taxes on a sale if you are able to legally defer taxes. You can invest nearly 100% from the sale via a 1031 whereas with a long term capital gains you will have to cough up 15% Federal and here in NC about 8% state tax.

[RedHogs]

I do not understand where RedHogs is coming from. Why pay taxes on a sale if you are able to legally defer taxes. You can invest nearly 100% from the sale via a 1031 whereas with a long term capital gains you will have to cough up 15% Federal and here in NC about 8% state tax.

My point is a tax liability will be following you for the life of the next property will the original cost basis. The current Cap. Tax is a temporay act that has been renewed by The republican congress every year under Bush..... Tax Breaks for the Wealthy...Welcome to the world of being considered the evil wealthy....Most Financial Forcast show Cap taxes up significantly over the next ten years....You will pay taxes on past profits on the new rates. You owe the money, now a 1031 lets you reinvest you tax liability, it is no different from borrowing money to invest. Many people swear by 1031's, i was taught by my father, who was taught by his father.....PAY the IRS first - then eat.

Don't take advice hear on 1031's they are extremely complex....

Pay a CPA and listen to what he has to say. He may say it is not much of a gamble....Your tax burden may be of little concern in the overall transaction. Keep in mind what has destroyed the small farmer was not drought or competetion...It was debt.

[MariaAZ]

Let me see if I understand this. I buy a property for $50,000. It appreciates in value to $100,000, at which time I do a 1031 exchange for a $100,000 property (I realize there are fees involved, but I'm keeping it simple for my sake). Years down the road, I cash out and sell the property for $150,000. My tax liability will be based on the original $50,000 purchase price, correct?

Does depreciation transfer too?

[agmantoo]

Your basis is the amount of the original property. Should you sell in the future you will pay taxes on the net profit or do another 1031. If you sold a property for $125,000 and your basis is $25,000 you would possibly have a $100,000 gain. In RedHogs method you could pay $23,000 in tax on the $100,000 gain and have a new basis in another property, should you buy, of $102,000 if you spent all the income from the sale. With a 1031, you could buy $125,000 worth of property. Neither example takes into consideration the transaction fees. From my viewpoint, I had rather have the appreciation and possibly the income from a $125,000 property than a $102,000 property. At $1000 per acre for tree production land I could buy 23 more acres. The appreciation on the additional 23 acres will offset a lot of taxes should I sell in the future and the 23 acres will produce and additional $100,000 in timber at harvest. The numbers thrown around for timber growth value is 12% return per year. This example was simplified for demonstration purposes.
I do not see much difference in doing the 1031 than having 401 retirement account. In the 401 you have the taxes deferred thus earning additional funds on money that is due the government which you will eventually pay taxes on upon withdrawal.

[ET1 SS]

With income property your 'basis' adjusts every year. It adjusts both up and down.

Buying land, then planting trees, you have made huge improvements onto the land, raising the basis. For example.

[agmantoo]

Adjusting the basis upward will give at least a twofold return IMO. The property value is overall increased and should a sale happen the appraised value will be greater on improved property. The monies spent to raise the basis will be a deduction at the time of sale therefore reducing the tax consequences. With a property that has an increased basis, if the money was properly spent, the return on the monies spent could be one of the best investments a person could make. Selling a property that has been significantly improved creates a situation where a 1031 exchange can happen and the replacement property can increase acreage held tremendously. This is a rather simple means of building personal wealth.