Looks like I've got a windfall coming. 1031 question.

[Paul A.]

Hello all. New here, but I've been a full time investor for a few years now. Anyway, I'll get to the point. I bought a small REO apartment complex three months ago for $100,000. It was totally trashed. Vandalized stole all the wire out of three units. Between purchase price and rehab cost I've got about $150,000 into it. My goal was to keep the property long term because it cashflows so well. However right as I was finishing the rehab, I get notified by the city that they are going to be acquiring my property for a city project. I've talked to the city, several other property owners in the area that have already sold to the city, as well as the appraiser when he came out to do the appraisal on my parcel. Nothings official yet but from what I've gathered I'm looking at getting somewhere between $450-500k from the city. Obviously a huge unexpected gain. I'm not complaining, but what can I do to reduce my tax bill. I guess my question is, if I do a 1031 exchange and acquire another property, which I then hold for over one year. Will it then be considered a long-term capital gain? Or will I still be subject to the short-term gains from this property.

[Steven Hamilton II]

Paul A,

Yes you can do a 1031 as it was simply your intent. Also you have extended rules for replacement property when you are force to sell.

"Condemnation is the process by which a government takes private property for public use with or without the owner’s consent. The government can be the federal government, a state government, a political subdivision, or a private organization with the assigned power to condemn. In exchange for the condemned property, the owner receives a reasonable amount of money or property called a condemnation award.

If a taxpayer receives a condemnation award of money or unlike property and purchases qualifying replacement property within a specified period of time, they may elect to postpone all or part of the gain realized on the condemnation. The entire gain may be
postponed only if the cost of the replacement property equals or exceeds the net condemnation award for the property. The amount of gain postponed reduces the basis of the replacement property. Losses are recognized in the year the loss is realized. Losses on
personal-use property are not deductible. Similar or Related Use
If the taxpayer receives only qualifying replacement property for the condemned property, postponement of gain is mandatory. The basis of the new property is the same as the basis of the condemned property. Qualifying replacement property must be similar or related in service or use to the condemned property.

Replacement Period
For any part of the gain to be postponed, qualifying replacement property must be acquired within a specified replacement period. The replacement period begins on the earlier date of the following:
Disposition of the condemned property The beginning of threat or imminence of condemnation For personal-use property, the replacement period ends two years after the end of the first
year in which any part of the gain is realized. For real property held for use in a trade or business or for investment, the replacement
period ends three years after the end of the first year in which any part of the gain is realized. Certain taxpayers cannot postpone reporting gain from a condemnation if they buy the replacement property from a related person. See Publication 544 for clarification."

I pulled this from one of my sources for you. This should explain that you can defer ALL of the gain if you choose for up to THREE years.

-Steven the Tax Guy

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