Avoiding Capital Gains need advise
My mother is 73 yrs olds and about to sell a rental property in Puerto Rico, shewill recieve about $80,000 from that sale. I am trying to find ways to help her invest that money and lose as little as possible to taxes, and still keep a monthly income flowing for her. Do I have to form a company to participate in in a 1031 exchange and avoid capital gains tax? Is this my only option? Any advise would be greatly appreciated.
There is an article you may be interested in reading called The 1031 Exchange Process in a Nutshell.
Tanya
Quote:My mother is 73 yrs olds and about to sell a rental property in Puerto Rico, ... Do I have to form a company to participate in in a 1031 exchange and avoid capital gains tax? Is this my only option? Any advise would be greatly appreciated. Millie,
No, you do not need to form a company to participate in a 1031 like-kind exchange.
Under the 1031 like-kind exchange rules, a property outside the US and a property within the US are NOT like-kind properties. Since your mother's property is located outside the United States, it appears that it is not eligible to participate in a 1031 exchange.
Suggest you consult a professional tax advisor for guidance on the tax treatment when foreign owned property is sold.
DaveT's post is mostly correct but I wanted to add a few items of clarification for you. First, I don't see any indication that your mother is planning to purchase a replacement property in the mainland U.S., in which case the like-kind problems with foreign property will not be a factor. Real property in Puerto Rico is always like-kind to other real property in Puerto Rico and, under some circumstances, property in U.S. territories may even qualify as like-kind to mainland property. Furthermore, I concur that you should definitely not form a corporation for the purposes of engaging in a 1031 exchange. Not only is it unnecessary, it may actually disqualify your otherwise valid exchange by altering the manner of ownership (referred to as "vesting"
. You should also be aware that in order to do a completely tax-deferred exchange, your Mother will not only have to re-invest the proceeds that she is netting but the entire net sales price of the property that she is selling (her "relinquished" property). In other words, she must reinvest into a property of equal or greater value, not just equal or greater equity. Furthermore, if your Mother is interested in maintaining income on her real estate investment while reducing management burdens, she may even consider looking into the possibility of reinvesting the funds with a reputable promoter of so-called TIC (Tenancy in Common) properties. This is a relatively new type of group investment vehicle that has been expressly sanctioned by the IRS as consistent with the principle of "like-kind" property but which carries no management burdens for the investor. Finally, your Mother should really consult with her tax-advisor to find out if she will incur any US capital gains tax liabaility on the sale so as to make a 1031 exchange worth pursuing in the first place. Best of luck. I hope that this helps.