1031 exchange question

[John Morgan]

I did a 1031 exchange a couple years ago. It was simple and seamless. I’m thinking about selling the property I bought with it for zero profit. If I sell this house breaking even (due to all the maintenance expenses I’ve had to put in it), will I still owe taxes on my initial investment I did a 1031 exchange on? In other words, if you make a killing on a property and 1031 exchange it, can you sell the new house you buy with the 1031 and not owe any taxes if you break even off it? Is there a time period for the next house you need to hold it for to not pay any of those taxes you saved by doing a 1031 exchange?

[Frank Chin]

@John Morgan

You got good advice here. I agree someone in your position should have a CPA to do the accounting, keep an eye on things, leaving the bookkeeping part to yourself.

I myself was in your position early on, did my own taxes for a few years after having a CPA for a while. My CPA quit and started another career. I thought I knew enough to do my own taxes and did it for a few years, patting myself on the back with all the fees I saved.

Fast forward a few years, I was involved with other businesses and more rentals, and got a new CPA. He found that there were deductions I missed and could've taken, that I didn't know about, long story, but turned out I loss out more than the fees I saved. Wasn't worth it to file amended returns.

In recent years, tax laws keep changing and I have to check with the CPA to see if expenses should be capitalized or not. To my surprise, things I thought should be completely capitalized were not.

Then some years back, I filed state returns involving unemployment taxes for my business and I didn't think it was a big deal. Wind up with a state inspector coming by comparing my employees to my returns, and I didn't have all the paperwork on hand. Called my CPA, who happen to know the inspector, put him on the phone with her, and he explained that he handled all my paperwork and should visit him at his office. He yelled at her "what are you doing there". Upon hearing that, the inspector who was all huffy and nasty up to that point, smiled at me, and said "sorry, I didn't know your CPA handled things". You can imagine how relieved I was.

My CPA did me a big favor as he didn't do that particular  state return at the time. But the inspector went to his office anyway and it was all taken care of somehow.

While it's true you are responsible for all your tax returns, liable for errors on it, by having a CPA on hand allows him to explain what happened when problems occur and save you a lot of grief and even criminal liability at times.

What you have, a chain of 1031's could be a challenge taxwise, if you do not know how to properly roll the tax basis for one property to another.