November 13, 2009

Frank's Like-Kind Exchange

There's a rule in the tax code that provides a way to put off paying tax on the profits from selling an investment property: The "like-kind exchange" (also called 1031 or Starker exchange). Basically you buy another investment property following rules that the IRS spells out.
This is the property Frank sold in Dale City: a house that he rented out. The rent covered his mortgage and there was a little left over. Meanwhile the house went up in value. Eventually it dipped down a bit but since he owned it a long time, he still made a decent profit.

This is the replacement property. It cost close to the same amount as the house he sold, even though it's larger and is nicely situated on a lake. It is farther away from DC so the price was reasonable, plus there were some cosmetic issues keeping the price down. But the location is great for us because it's an hour closer to our home than Dale City was so we can drive there to take care of it much more easily.

Another plus is that we can enjoy looking at the lake whenever we spend time working on the house. We've been fixing it up over the past week. It should look pretty good in a few more days. Frank has already placed it in the multiple listings (MLS #WR7203627).

I'm still looking for an exchange for the house I sold. Ideally, it will be within an hour's drive of our home in Basye AND an hour's drive of Northern Virginia (like the one above which is near Front Royal), will be in good shape, and will have features that make it likely to appreciate in value. I found this one for Frank and insisted that he see it because it's waterfront and within commuting distance from No. Virginia. He loved it as soon as he saw the lake!

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