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Updated almost 3 years ago,
1031 vs Self directed IRA
I signed A contract to purchase a home about a year ago for 380 K. I’m going to take position in a months time. The house is now worth about 600 K. Looking at all the comps and history off the prices here in Phoenix metro area, I am almost certain that this price is not sustainable. So I want to sell it and cash in the profit. I also have a contract on a property in Peoria (replacement property) for around 580 K. I will be getting possession of the property in about six months.
With this context, I have three choices to make:
1. Buy the property for 380 K and immediately sell it for 600 K pay the taxes on the profit and Collett a day. This offers no tax benefits and is probably the worst option so, I’m not considering this unless someone can show me it is.
2. Use the money I have in one of the IRAs to open up a self-directed IRA, have the self directed IRA purchase the property and immediately seller the property tax free, the. move the money back into the original IRA, close the self directed IRA.
3. Buy the property normally, do a 1031 exchange with the replacement property I am buying in Peoria and move forward the profits into the new property.
Option #2 seems clean for me. I move all the profits into my IRA tax free and have no worry about the future legislation around 1031whether they keep it or not. The concern is, whether IRS agrees with the acquisition cost since I wrote the contract a year ago and the fair market value as of today is more like 600k.
Option #3 allows me to move the profit into another house, but still runs the risk of questioning by IRS whether the subject property is eligible for 1031 since I never rented it, even though my intent from day one is to rent (I have another property that I bought in the same neighborhood and rented it already to prove my intent is serious. I also don’t live in the state).
I would really appreciate if someone can suggest which of these options I should pick and why. I’d also appreciate if you can highlight any tax implications that I’m failing to identify.
thank you in advance.