Like-Kind Exchanges

[Alfredo1967]

I have a client who started building houses for a profit. He sold his first house last year in June and just put for sale his second house this month of July 2024. He is telling me that his real estate agent told him that he can use section 1031 so that no gains are recognized on the sale of his first house. 

Is this true? Can anyone help me because I read the instructions on form 8824 and I don't see how he can qualify to use section 1031.

[Just-Lisa-Now-]

He needed to use a 1031 intermediary for the sale...did he do that?

[sjrcpa]

A builder's houses are inventory and are not eligible for 1031.

[abctax55 · Accepted solution]

I don't see how he can qualify to use section 1031.

You are correct - spec houses don't qualify & never have.

"Building for a profit" = a death knell for both §1031 *AND* capital gains treatment.

[abctax55]

(and I've said more than once.... Juno could pass the realtor test.... )

[PATAX]

@abctax55 you should apologize for that statement. Yes apologize to Juno, he is much too smart to compare to Realtors.😉🐕☝

[abctax55]

@PATAX 

Juno be a 'she'..... or used to be anyway 😉

She'll be 11 years old in three weeks - the grey is taking over the black.  But she's is still beautiful.

[Alfredo1967]

Good morning Lisa and thank you for your response. I don't think he used an intermediary for the sale. Well he did use a realtor. 

[Alfredo1967]

Thank you for your response SJR.

[Alfredo1967]

Thank you very much for your response. I worked out form 8824 and base on his sales transaction, he does not qualify for section1031.

[PATAX]

@abctax55 sorry about that. Heidi's gray is taking over too on her chin and around her nose. She's 10 now. But like Juno she is still beautiful/good hearted inside and outside.

[abctax55]

@PATAX 

I keep teasing her that we ordered a 'black' dog, not a black & white one.  And she, too, is beautiful inside & out.

[Alfredo1967]

No he did not.

[qbteachmt]

"He is telling me that his real estate agent told him that he can use section 1031 so that no gains are recognized on the sale of his first house."

Did he operate it for rental, after building and before selling?

For future reference, a 1031 exchange intermediary is basically an escrow agent for handling the exchange properly, so that your client does not violate the rules. They don't replace the real estate agent, and a real estate agent is not, by definition, a Qualified Intermediary for a sale, since they represent the seller. There's a time restriction, too.

https://atlas1031.com/basics/what-is-a-qualified-intermediary/

Your client is in the construction business. The invested costs are inventory asset, until sold; not expense.