Most of you bloggers know that an Exchange Coordinator (EC) is the person in our office who handles all of the paperwork on the Section 1031 exchange. They are highly trained and experienced individuals. In fact, in our office, the EC must have been a real estate paralegal for at least 5 years before we even interview them for an EC position. I believe we are the only Qualified Intermediary Company in the Section 1031 industry that has this strict hiring requirement. Now that I've given you the experience factor, one of our EC's asked me to solve a problem for which she had no resolution. She tried to solve it, but couldn't come up with a satisfactory answer. It involved her father. Her father built a spec home and wondered whether he would be able to do a 1031 exchange.
She told her father, correctly by the way, that she didn't think he would qualify because most developers or builders who build or renovate and then sell, would be considered to be “dealers”, because they held the property primarily for the purpose of reselling it. That of course would not qualify for a Section 1031 exchange, because you must hold the property for investment purposes or for use in the trade or business. It can't be inventory or primarily held for sale.
If this were to go to through the court system, the main test would be: What was your intent? If you can prove that you are an investor and not a dealer then, of course, you can pursue the 1031 avenue or, at least, pay capital gains taxes. If you are a dealer and this is a business, then no matter how long you held the property, it would be taxed as ordinary income. Ordinary income, of course, is taxed at a higher rate.
Comments