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Can You Do a 1031 Property Swap for Your New Nordhavn (or other boat)?

Posted by Keith on May 31, 2007 at 7:30 am  

Keith,

I would like to buy a Nordhavn and cruise inland up the Alaska coast.

I would also try to charter the ship to help with taxes, etc. I have real estate — vacant land — and wonder if I could do a tax-free 1031 exchange — the land for the boat. I would use the boat as my primary residence, and would also charter it.

I enjoy reading of your adventures and financial information. Thanks for your help.

Mike


MIKE,

I’ve asked my personal accountant, Jon Burdell, in Scottsdale, AZ, to respond to your question. Also, keep in mind that if you charter your boat, you must also address various liability and insurance issues. Jon’s contact information is below. Here is his response:

–Keith

The short answer to Mike’s question is “no,” because vacant land and a cruiser are not “like kind” assets. But you can’t use that answer until I give you some technical background and Code citations. I’ll dig out the definition of “like kind” to explain why IRS won’t allow this as a tax-free exchange—that is, how they define classes of assets for purposes of like-kind exchanges. But the technical detail will support the short answer I gave you.

Keep in mind, too, that IRC §1031 allows for exchanges of investment or business property, not property “to use as primary home.” Exchanges / sales of primary homes come under §121, the rules for two-year occupancy, etc..

What’s the potential gain on the land? Long-term capital rates have never been lower, and will one day probably be higher. Is there a downside to taking a profit at the lowest rates available?

What’s the cruiser going to cost? If you use it for business, you’ll want to depreciate that cost, right? Under §1031, the deferred gain is subtracted from the depreciable basis of the replacement property; that is, the amount that you can depreciate the cruiser is lowered. What’s your business plan? What bracket will your charter income put you into? Finally, will you be exchanging depreciation deductions on the cruiser at 25-35% for a deferred long-term capital gain at 15%? Not a good idea.

Hope this helps. Feel free to call.

Jon Burdell,
David L. Buterbaugh, PC
8040 E. Morgan Trial
Suite 15
Scottsdale, AZ 85258
(480) 905-3640


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