What Are the Differences between Sections 1031 and 121?

Tina Colson: Glad to be here, and I’m glad that you are viewing us today. David, my question would be, we have clients who own property where it’s their residence, but also maybe they’ve got farm land with their residence, and they’re using that as timber income. Is there anything that we can do on the 1031 side, that could help them with their tax gain, if they sell this property?

David Moore: Great question. I think you’ve got to look back, and understand. I’m not going to talk about ages because I don’t want to get anybody upset. If we go back to 1997, we used to have a rule, section 1034, that covered home sale. It had certain provisions there. If you’re 55 or older, you had a one time, lifetime exclusion of $125,000 in gain. That got to a point in ’97 where it didn’t really seem to do that much, so it was replaced- that was 1034, it was replaced with section 121. We call that the Universe Exclusion.

That came in and gave you personally a $250,000 exclusion, a married couple had a half million dollar exclusion. To qualify for that, you had to have lived in the property for the aggregated two of the preceding five years. So, in ’97 that looked like a pretty good thing, 250 or 500.

Now, we go forward a number of years, 23 years, and 250 or 500 exclusion doesn’t do much for a lot of people. Let me ask this, and I don’t mean to put you on the spot. You and I have talked about it, you were talking about buying a plex. Let’s say you buy a duplex, and you live in half of it, and you’ve had it for the last five years. What are you selling then?

Tina Colson: I would say that my portion would be my personal residence, but I own the whole duplex. Which then I also have my investment property with that 50/50.

David Moore: Exactly. Let’s look back at your question. The question is really, if we’ve got a larger property, and the example timber … timber. The example timber Tina gave me is that, we’re talking about a residence, and we’re talking about a property that contained timber.

Timber in and of itself can be Exchanged. It depends on whether it’s standing or severed. Standing timber’s real. Severed timber’s personal property. Timber deed is real unless it contains a harvest provision. In and of itself, the timber can be treated differently depending on what the situation is, but let’s go back.

The initial question was, I’ve got a property that contains some of this stuff, but we’ll just break it down. Anybody with, let’s say, a farmhouse on a working land, or that duplex half owner occupied, half non-owner occupied. All those things, we’re talking about a single asset with allocations from many different directions.

David Moore: The timber component. Let’s say you’re going to take the homestead portion, you’re going to go section 121 with it. You’re going to take the balance of the property and go 1031 with it. Our contracts are just going to read we’re doing an Exchange of a portion of the asset. So, what we’ve got to really do, and this is where your tax people are really critical. I just want to really instill upon people. I think the way the world’s going, it’s more and more complicated than ever before, today.

People have a tendency to go hire attorneys when they need them. But a CPA, a great CPA, you want to pay somebody that’s … you want to pay them for an answer. You don’t want to pay them to learn. Great tax people are critical in today’s world, I think more so than ever before. When we’re looking at, let’s say, that allocation. If it’s a mirrored unison duplex, it’s pretty easy to make that allocation, right? Fifty-fifty.

David Moore: If it’s something else, how do you make those allocations? That’s where your tax people are going to come in. My advice today is, we’re going to look at the asset, we’re going to say, “What is the universe exclusion going to cover?” Let’s max out the exclusion, and then anything beyond that is going to go 1031.

So our contracts, they’re just going to read we’re doing Exchange of a portion of that property. It’s up to the taxpayer and their tax council to make that allocation. Hopefully, at the end of the day … You’ve worked with us for a very short period of time now, just a couple of months. What is our job? Our job is to keep people’s money theirs, right?

Tina Colson: Yes.

David Moore: What do we say? What’s our saying?

Tina Colson: They work hard to earn their money. We work hard to make it theirs, and keep it theirs.

David Moore: Exactly. We’re going to look at it, we’re going to work with the taxpayer, their tax council, to get those allocations made, and keep your money yours. There’s a variety of tools to do it, and Tina’s question just really tees up one of those big ones. In situations like this you really have to look at what you’re selling. Not only look at what you think it is, but what you think it could be.

People ask all the time, Tina, “When should I contact you? When should I think about the Exchange?” I typically tell people, when they buy something. Talk to your tax. When does the average person talk to their tax person, April 14th? Sorry. Sorry, Dale. Anyway, the bottom line is, use your tax people or tax planning if you’re going to sell something.

David Moore: Anytime you’ve got a question, reach out to us. We always say, “Hey, we’re the guys with the answers.” We want you to ask the questions. If it’s something that we can help you with, what we’re going to do, we’re going to answer the question, we’re going to arm you with information. Go talk to your tax people, and work with them to keep your money yours, and keep it growing.

Great question. Thanks for joining me today.

Tina Colson: Thank you for your answers.

David Moore: David Moore, Tina Colson, Equity Advantage, 1031Exchange.com, IRA Advantage, iraadvantage.com. Thank you.

Tina Colson: Thank you.