A — May 25 - June 7, 2012 — Mid Atlantic Real Estate Journal
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Mid Atlantic R eal E state J ournal Publisher ............................................................................Linda Christman Co-Publisher .........................................................................Joe Christman Section Publisher ..............................................................Michael Campisi Section Publisher ................................................................Elaine Fanning Senior Editor/Graphic Artist ................................................ Karen Vachon Production Assistant ......................................................... Rachel Rugman Office Manager ....................................................................Joanne Gavaza Editorial Consultant .............................................................. Ben Summers Guest Columnist .................................................Lee David Medinets, Esq. Mid Atlantic R eal E state J ournal ~ Published Semi-Monthly P.O. Box 26 Accord, MA 02018 (Mail) 312 Market Street, Rockland, MA 02370 (Overnight) Periodicals postage paid at Rockland, Massachusetts and additional mailing offices Postmaster send address change to: Mid Atlantic Real Estate Journal, P.O. Box 26, Accord, MA 02018 USPS #22-358 | Vol. 24 Issue 10 Subscription rates: $99 - one year, $198 - two years, $4 - single copy REPORT AN ERROR IMMEDIATELY MARE Journal will not be responsible for more than one incorrect insertion Toll-Free: (800) 584-1062 | MA: (781) 871-5298 | Fax: (781) 871-5299 www.marejournal.com
Mid Atlantic Real Estate Journal
DEBT | EQUITY INVESTMENT SALES Capital Markets
Lee David Medinets, Esq. Residential Property and §1031 Exchanges
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W
hen investment prop- erty is sold, capital gains taxes must
generally be paid on any gain realized. With a §1031 Ex- change, however, investors are allowed by the IRS to postpone paying these taxes. This sub- section of the Tax Code states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business, or for investment.” In addition to maintaining greater net profits for reinvestment, investors can use a §1031 Exchange to shift an investment from one geo- graphic region to another, trade older properties for newer ones to avoid deferred maintenance expenses and diversify a real estate portfolio. The IRS stipulates a number of requirements for a valid §1031 Exchange. Property own- ers must trade one or more relinquished properties for one or more replacement properties of “like-kind.” The replacement property cannot have been acquired for immediate resale, nor can it be the taxpayer’s per- sonal residence. However, it is the facts and circumstances of each transaction that determine whether a property is held for investment, rather than for personal use. Many have rec- ommended that – to be on the safe side – taxpayers should hold the replacement property for at least two years before converting it to personal use, and should make significant efforts during that time to use it for investment purposes. In the recent case of Reesink vs. C.I.R., T.C. Memo 2012-118, No. 2475-10 (April 23, 2012), the U.S. Tax Court has taken steps to better distinguish the holding purpose for residential property. In this case, the Court considered whether a single- family house was acquired by the taxpayers as a personal residence or as an investment. In 2005, Mr. and Mrs. Re- esink sold a 50 percent TIC interest in a San Francisco apartment building for the gross sales price of $700,000. They used the net proceeds a little over one month later to ac- quire a single-family house and a vacant lot in Guerneville, CA. Their mortgage loan application
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indicated that the property was purchased as an investment. “For Rent” signs were posted on the property. Flyers were distributed throughout Guern- eville advertising the property for rent. Two prospective ten- ants examined the property to consider leasing it, but each decided that they could not af- ford the asking price of $3,000 per month. The taxpayers never lowered their asking price, and the property was never advertised for rent in any local newspaper. The court did not say if the property was ever listed for rent with a real estate broker, although the taxpayers consulted with one. After failing to rent the Guerneville property for some time, Mr. Reesink wanted to sell the couple’s home in San Fran- cisco because they could not afford the carrying costs of all the real estate that they owned. Mrs. Reesink resisted this idea because she liked living in San Francisco and because she did not want to take their son out of his current high school. Nev- ertheless, the couple listed their home in San Francisco inApril, 2006, about six months after they acquired the Guerneville property. At that time, they con- sidered either moving to Guern- eville or moving in with Mr. Reesink’s sister. Two months later, when their San Francisco home was sold, they elected to move to Guerneville. That was almost eight months after they acquired the Guerneville property. Until they moved in, they had never stayed in the Guerneville property or used it for any personal purpose. On these facts, the court found that the Reesinks’ prin- cipal intention in acquiring the Guerneville property was for in- vestment, not personal use. The court stated that perhaps the
strongest evidence of the Re- esinks’ investment intent came from Mr. Reesink’s estranged brother, a witness for the IRS, who testified that Mr. Reesink told him on several occasions that they planned to move to the Guerneville property af- ter their son graduated from high school. That would have been significantly more than two years after they acquired the Guerneville property. This testimony gave weight to the position of the taxpayers that they had changed their minds because of financial difficulties when they decided to move to Guerneville in 2006. In concluding that the tax- payers had satisfied their burden of proving that they purchased the Guerneville property principally for invest- ment, the court distinguished this case from Goolsby v. Com- missioner, T.C. Memo. 2010- 64. In Goolsby, the Tax Court found that the taxpayers did not have a bona fide investment intention when they acquired the replacement property. In Reesink, the court pointed out that in Goolsby (a) the taxpay- ers made the purchase of the re- placement property contingent on the sale of their home; (b) they sought advice concerning when they could move into the replacement property; (c) their rental efforts consisted solely of placing one advertisement in a local newspaper; (d) they began refinishing the basement of the replacement property within two weeks of acquiring it; and (e) they moved into the replacement property within two months of acquiring it. Goolsby and Reesink help to define the burden of proof that taxpayers will be expected to meet if they move into a replacement property before continued on page 3A
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