1031
Hi I have a rental that I want to sell, I will be making about $125,000. I am selling for $300,000 and I want to buy another multifamily cash for $125,000. Can I do a 1031 or the new property has to be above $300,000.
Thanks,
The replacement properties must have values whose sum equals or exceeds the value of the relinquished property(ies).
any money, or debt relief that you receive that is not reinvested is taxable.
for example original property
300,000 sales price
100,000 1st mortgage
= 200,000 profit
replacement property
150,000 purchase price
100,000 1st mortgage
50,000 down payment
150k is now taxable gains
sanjosee, the mortgage balance has nothing to do with the 1031 calculations for a delayed (forward) exchange.
Instead, for the delayed exchange to be completely tax deferred, the purchase price of the replacement investment property must equal or exceed the sale price of the relinquished investment property. Additionally, all of the net sale proceeds (not just taxable profit) must be reinvested in the replacement property acquisition.
Selling a $300K property and replacing it with a $125K property makes some or all of the $175K difference between the sale prices taxable capital gain. In effect, the exchange is nullified.
DaveT is right on the money. You must trade equal or up in value based on the net sales price, and you must reinvest all of your net proceeds that come out of the closing. The proposed transaction would be trading down in value and will probably not defer any capital gain taxes. You can always acquire a second property on top of the one that you are considering and as long as the two (or more properties) meet the requirements you will be fine.
[addsig]
What are the average capital gains for a sale that results in a 30000 profit? I paid 32000 for the home and will sell for 60000. My personal income is less than 60000. What can I expect to have to pay in taxes?
The maximum capital gains tax rate on the sale of investment property held at least one year is 15%.
If the property is your primary residence and if you meet the two year ownership and occupancy requirements, your sale profit is tax free.
I disagree that mortgage balance has nothing to do with a 1031 exchange. There are rules regarding debt reduction "boot".
Also, you are not prohibited from trading down in an exchange theoretically, it just means your exchange will not be entirely tax free. Which is why the rule of thumb is always trade equal or greater value to keep the exchange entirely tax free.
I stand corrected on the profit of the transaction being a factor. You are right. Any net cash received from an exchange is considered taxable.
Also, I forgot to also concur about buying additional property as long as it qualifies to help meet the equal or greater rule of thumb.
Ok, I am going back to read my reference material given to me by Chicago Title. I really appreciate you guys making me aware of any errors I might be making.
This shows the great value of this board.
So, if I am understanding this correctly, the rules for carrying equal or greater debt do not apply specifically to a delayed exchange, but do apply to a simultaneous exchange?
Maybe Bill Exeter can confirm this, I know his expertise is greatly respected in the 1031 industry.
Dave T told you that the mortgage balance is immaterial in a delayed exchange. Bill Exeter said that Dave T is right on the money. I took this as a fairly definitive answer to your question about mortgage boot in a delayed exchange.
This is one of those areas where there is a lot of incorrect information in the industry. It is not entirely inaccurate, but it is deceiving. There are general three rules that one must follow in order to defer 100% of the capital gain taxes.
(1) Trade equal or up in value. If you sell for $500K you must buy replacement property(ies) worth $500K or more based on your net sales price.
(2) You must reinvest 100% of your net cash proceeds. You can always pull some cash out, but it will trigger a taxable event.
and, finally, the last one which creates the confustion;
(3) It is generally communciated that one must replace the amount of debt paid off during the sale process with the exact same amount of debt on the replacement property(ies). This is a little deceiving. First, as long as you trade equal or up in value, and you have reinvested all of your net cash proceeds, the difference will be the right amount of debt on the replacement property. However, you can replace debt with cash. Many advisors say that you have to replace your debt because most investors do not have the liquidity to replace debt with cash and many investors do not want to trap more cash in the property by replacing debt with cash, but you can. For example, if you sold property for $500K with a $300K mortgage and with $200K in equity, you could buy replacement property(ies) worth $500K or more, reinvest your equity of $200K and obtain a new mortgage on the proeprty of $200K or you could pay all cash of $500K for the property (you traded equal in value, reinvested your equity and replaced your debt with cash in the amount of $300K).
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How about the holding period? Ive been told one year on the property being sold is this correct?
Also can i exchange land $500,000 held long term for condo $600,000
Bill,
Thank you very much for your detailed answer to my specific question. Your expertise & willingness to share is invaluable.
Your explanation was perfect
You are most welcome.
The holding period is one of those areas that has not been clearly defined either. Most experts, including myself, recommend a holding period of at least one year or more to demonstrate that you had the intent to hold the property as rental or investment property.
You can exchange land (if held for investment, rental or use in a business) for a condo.
[addsig]
Hi,
I use Sterling Trust out of Waco, TX.
Not had any problems yet but only been with them about 6 months.
Craig
Search the internet under Self Directed IRA and you will find a number of them listed.
[addsig]
Thanks for all the responses -
Yes, I did pay rent- but only the mortgage and HOA fees, not anything above so she was not making additional income on the property.
She is self-employeed so barely pays taxes after all the credits and write-offs - would that make a difference?
We could possible hold for one year plus one day - that would only b a few months past when we were looking at already.
Thanks for all the suggestions.
Just looked up the federal tax brackets - she would fall into the 15% tax table because she makes less than $29K, would that mean that she would pay 15% gains tax - or is there a minimum of 28%?
Thought of another thing -
Say she makes $15k this year before going to India, where she makes $0, then she nets $20K on the sale of the condo - would that push her into the $35K tax bracket, or would it be based on her earned income still at $15K?
And does that income bracket go off of total income, or adjusted gross (after all deductions and write-offs)?
Sorry so many questions -
thanks