What did I mean by that question? Let me use as a transaction that occurred this morning.
"Mary" originally purchased a condominium as an investment 14 years ago, at the price of $137,0000. The property went up and down in value (today's real estate market isn't great). At one time the value had gone up to over $500,000, but do to today's recession, she was only able to get $390,000 for her condominium investment. On paper she made a $253,000 profit ($390,000 less $137,000 = $253,000 profit). She could be taxed Federal capital gains tax, Federal depreciation tax and State income tax on the transaction. In her particular case, she would have to pay $78,430 in taxes.
What she wanted to do was also use some of the funds from the sale to purchase a new automobile, which would cost her around $28,000--but more importantly, she would also have to pay additional taxes on that $28,000. So the question came up, what if Mary did a Section 1031 exchange--could she save on the taxes and still use part of the funds to purchase the automobile?
Our suggested answer was to do a Section 1031 exchange. She would go out and purchase a replacement investment property of at least $390,000, using all of her funds from the sale of her investment condominium. Three (3) months after closing on the replacement investment property, should could go out and refinance her new investment property, and use some of those funds to purchase her automobile. She would not be paying any tax on her sale and is allowed after a "reasonable time" to refinance her investment property. Of course, as the Qualified Intermediary, we are not allowed to give legal or financial advice, so she of course agreed to check with her financial and legal advisors, to make sure they agree with the above suggestion.
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