June 24, 2025

1031 Exchange Rules When Buying in a Different State

1 hour 10 minutes

In this comprehensive Tax Tuesday episode, Anderson attorneys Amanda Wynalda, Esq., and Eliot Thomas, Esq., tackle complex tax strategies focusing heavily on 1031 exchanges and business deductions. They explain why fix-and-flip properties cannot use 1031 exchanges since they're considered inventory rather than investments, and suggest using C-corps or S-corps for tax savings instead. The attorneys dive deep into 1031 exchange mechanics, covering depreciation carryover basis, cost segregation complications, and state clawback rules in California, Oregon, Montana, and Massachusetts. In other topics, they discuss the heavy SUV deduction for vehicles over 6,000 pounds, explaining how to maximize depreciation through Section 179, bonus depreciation, and MACRS while requiring material participation. Other tips include strategic use of management C-corps for rental property mileage deductions through accountable plans, qualifying for 0% capital gains rates, handling Ponzi scheme losses through IRS safe harbor provisions, tax implications of timeshare deed-in-lieu transactions, and expatriation exit taxes for high-net-worth individuals renouncing US citizenship.

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Highlights/Topics:

"I own an LLC that I use to purchase a single-family house to fix and flip. Can I use a 1031 exchange to save on taxes while I look for my next property?" - No, fix-and-flip properties are inventory, not qualifying investments.

"I have five years left of depreciation on rental property. I was looking into a 1031 exchange but didn't realize that the depreciation schedule remains. Can I do a 1031 to defer some capital gains but no longer depreciate and/or buy another property and get new depreciation schedule for that one?" - You get carryover basis plus new excess basis depreciation.

"What are some of the rules regarding a 1031 exchange when selling a rental home in one state, but purchasing the replacement property in another state?" - Allowed, but watch for clawback rules in four states.

"If I buy a car with a weight more than 6,000 pounds for my newly incorporated business and have not earned any income in the first year of business, can I use it to reduce taxes against my spouse's W2 income?" - Yes, through S-corp with material participation and 50% business use.

"I own a rental house and a management corporation, which is a C corp. How do I deduct mileage for my rental activity?" - Use accountable plan reimbursements from C-corp for tax-free money.

"How does one qualify for 0% capital gains?" - Single filers need taxable income of $48,350 or less.

"I invested in an ATM syndication. It was a Ponzi scheme and all investment was lost. The K-1s I received for previous years were fraudulent. How do I file my taxes for those years that I received a fraudulent K-1?" - Use IRS safe harbor provision for 75-95% ordinary loss deduction.

"What are the tax implications of doing a deed in lieu for a timeshare?" - Creates cancellation of debt income taxed at ordinary rates.

"What happens to your real estate if when you move outside of the country, is it deemed disposition?" - Only if expatriating citizenship, then exit tax applies.

Resources:

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