1033 exchange question

[Vanessa Allen]

After fighting a privately owned utility for 4 years, having condemnation filed against me, and countless other acts of harassment etc... I settled with the utility.  The land taken is a 50 foot wide NG easement across my personal 125 acre farm where I also live.  There will be no question if a 1033 is appropriate as I am 1 year into the court action against me.  I have several questions and will be grateful to anyone willing to help:

1. How do I count the "cost basis" that will not need to be reinvested?  When we bought the land, it was a blank slate, no utilities, no driveway. Since then, we have built our home and other structures.  The court appointed commissioners assigned the value at around $146K after factoring in depreciation on our home. It's a total of 2 acres of land. We were paid much more than the 146k.  We will not sell this property in our life time. 

2.  How long do I have to reinvest? 2 or 3 years?  The internet is full of conflicting info. and very little can be found about 1033s in general.

3.If we build a structure ( a pole barn) on the land, could we count that investment as part of the 1033 exchange? 

4. Any recommended CPAs in the Louisville Ky area?

We are mom-and-pop single family rental owners and have been for 15 plus years. We are hoping to avoid reinvesting as much as possible because the market here is CRAZY high right now. 

[Steve Morris]

You rarely see 1033s, but usually its govt taking your property thru condemnation and giving you $X dollars.

If it is a legal/valid 1033, to get a total tax deferral, you basically only need to buy a place within 2 years at >$X that qualifies as suitable investment real estate.

As far as your basis and depreciation recapture when you do end the deferral, shouldn't make a difference.

However, FIND A 1031 QI IN YOUR TOWN AND ASK BEFORE YOU DO ANYTHING IN RELIANCE.

[Vanessa Allen]

Anyone?

[Buddy Holmes]

I am not an expert by any means, but let me comment from what I have learned about the 1033 from my fire loss of a rental single family home.

The closest use of a 1033 in your described case would be if the land taken was used for some income producing use. For example growing crops or raising cattle or other farm use. In this case, because of condemnation you have an extra year, from my description of what I learned for the fire loss. You would have to invest in a new "like kind" property at least the total payment from the utility plus some proportion of gain of that property from current basis to current FMV.

The "like kind" is more restrictive than for a 1031, so my guess is it would have to be another parcel of farm land.

A CPA or good tax office should be able to  help with the additional gain (if any) from the utility payment.

Just thinking, you can't depreciate land, so for farm land there may be no basis adjustment at all, just a proportion of what you paid originally for the vacant land.

hope that helps a little.

[Nathan Gesner]

I have to admit, your original post is a little confusing. I can address the 1031 Exchange. When you sell a property, you can do a 1031 Exchange to transfer the proceeds of your sale directly into the purchase of a similar property without paying taxes on those funds. There are strict limitations. You will have to identify up to three possible properties for purchase within 45 days of selling the first property. You have to close on a property within six months.

You also have to use a 1031 Exchange qualified intermediary to hold the funds between transactions and prove they qualify for tax deferment.

[Scott Wolf]

Originally posted by @Nathan Gesner:

I have to admit, your original post is a little confusing. I can address the 1031 Exchange. When you sell a property, you can do a 1031 Exchange to transfer the proceeds of your sale directly into the purchase of a similar property without paying taxes on those funds. There are strict limitations. You will have to identify up to three possible properties for purchase within 45 days of selling the first property. You have to close on a property within six months.

You also have to use a 1031 Exchange qualified intermediary to hold the funds between transactions and prove they qualify for tax deferment.

I was confused too Nathan but found this helpful article online. Very similar tax shelters, with a much more generous period due to the nature of the "sale" in a 1033. https://www.eaglewmg.com/1033-...

[Steve Morris]

You rarely see 1033s, but usually its govt taking your property thru condemnation and giving you $X dollars.

If it is a legal/valid 1033, to get a total tax deferral, you basically only need to buy a place within 2 years at >$X that qualifies as suitable investment real estate.

As far as your basis and depreciation recapture when you do end the deferral, shouldn't make a difference.

However, FIND A 1031 QI IN YOUR TOWN AND ASK BEFORE YOU DO ANYTHING IN RELIANCE.

[Buddy Holmes]

The 1033 does not use a QI.  For condemnation of property you have three years rather than two.  You need to calculate the basis of the property at the time of sale to the property to the utility for the calculation of how much gain is deferred so you can fill out the 1033 form for your initial tax return declaring the start of the 1033 exchange.

BTW you did say easement. the payment was for the lack of use of the easement and you still own the property?

If there was no sale of easement land, I don't think the 1033 even applies.  If it is just a payment for the future lack of use of a portion of your farm, and a court has determined what that loss is for utility's payment, I don't think you would owe any tax on that payment.  Just my uninformed view of what would be right.  The IRS may think differently.  If the utility sends you a 1099 or 1098 then they know how the IRS views the payment.  If they don't send you one then go by what your taxman says.

[Steve Morris]

Buddy Holmes, I've seen ONE in 15 years (and not even my deal), so my ignorance is due to lack of exposure.  You're prob right.

[Steve Vaughan]

Originally posted by @Buddy Holmes:

The 1033 does not use a QI.  For condemnation of property you have three years rather than two.  You need to calculate the basis of the property at the time of sale to the property to the utility for the calculation of how much gain is deferred so you can fill out the 1033 form for your initial tax return declaring the start of the 1033 exchange.

BTW you did say easement. the payment was for the lack of use of the easement and you still own the property?

If there was no sale of easement land, I don't think the 1033 even applies.  If it is just a payment for the future lack of use of a portion of your farm, and a court has determined what that loss is for utility's payment, I don't think you would owe any tax on that payment.  Just my uninformed view of what would be right.  The IRS may think differently.  If the utility sends you a 1099 or 1098 then they know how the IRS views the payment.  If they don't send you one then go by what your taxman says.

Thank you for educating me today.  I had never even heard of a 1033 before. 

[Buddy Holmes]

Thanks @Steve Vaughan I had never heard of it either before the fire destroyed my rental and @Dave Foster was kind enough to point out the law and that it would most likely help me.  There was so little on the 1033 on BP I just wanted to add what I have learned.  Turbo Tax even has a form for the 1033!!

[Dave Foster]

@Buddy Holmes, happy to help.  It's not an often used statute since it's always preceded by a disaster of some sorts or some kind of govt overreach.   So thank heaven's it's not common.  But thank heavens it's there.

[Steve Morris]

The thing that is curious about it is you need a condemnation and that usually means some govt involvement, unless its a public utility, govt:

1) Doesn't like the "optics" of condemning property and

2) Fight utilities all the time if something is NOT green energy and windmills.

I've asked local govt here since I think for the right deals, a 1033 would work great for all involved (assuming they want out and can get FMV for their property).

[Vanessa Allen]

The Condemnation action was from a public utility. I settled while the case was still pending in court, prior to the evidentiary hearing.

The utility has an easement on my land but I still retain ownership, it just limits my use. So, do I owe tax on this money/have to do a 1033 or no?

I have called more CPAs than I can count and met with a tax attorney last week who said he is familiar when I scheduled but only knew about 1031s when we got there!

Thanks so much for the responses!

Any further thoughts?