1031 exchange question

[Ron Turner]

Hello all! Had a question about the use of a 1031 exchange, sorry for the backstory but it may be helpful! Bought a land lot 2 years ago for $50K with the intentions of building a rental property. I've decided to purchase a house instead for the same purpose. If I sell my current lot for say $140K, can I use the proceeds as a down payment for the house, with me paying cash for the remaining amount of the cost of that house (lets say its $250K)? If so, if I rent that house for a number of years then decide to sell it outright (no Exchange), what part of the purchase/appreciation/etc am I on the hook for regarding capital gains? TIA!

[Dave Foster]

@Ron Turner, Yes you can.  Your intent was to hold the lot for productive use with a rental on it.  And you've held it for 2 years.  A 1031 would be appropriate.  You could use the lot sale as a down payment with either a loan or cash to make up the rest.  So far so good for the 1031.  The basis of the lot goes into the purchase and the rest is either profit or additional depreciable basis.

If you later sell you would liable for all tax including

1. the appreciation of the lot (no depreciation because you don't depreciate land)

2. The appreciation and depreciation on the structure from it's time of being put into service.