Capital Gains
Just wondering if anyone knows the taxation of profits immediately deposited or used as a downpayment for a smaller dwelling. My question really is asking if profits never get into my hands, do I still pay the cap. gains tax. Although I know if I "upgrade", I will not have to pay it, but this particular deal would be considered "downsizing" Anyone able to help would be greatly appreciated.
This deal was a q-claim from an owner avoiding foreclosure, less than a week old.
[ Edited by truepro on Date 08/28/2005 ][ Edited by truepro on Date 08/28/2005 ]
Depends, sometimes, on what you sold and what you purchased. Give us a little more detail for a meaningful response.
Is the property you sold a second home, rental property, or your personal residence?
If your personal residence, how long did you own, how long did you occupy, when did you vacate?
Thanks guys, but could you give me a little update on that 1030??? Thanks again
The tax treatment on the sale of your personal residence, on the sale of your second home, on the sale of your rental property, and on the sale of a property you are flipping could all get different tax treatments. Capital gains exclusion and tax deferral strategies do not apply to each situation, and the character of income is not the same for all situations either. I asked specific questions to clarify your situation, because until we knew more facts, noone would be able to give you an informed response..
Paul tried. Though well intentioned, Paul did not quite get it right -- there is no such thing as a 1030 exchange. I am sure he really meant to steer you toward a 1031 exchange (1031 is the section of the tax code that details a tax deferred exchange). Based upon your edited post, an exchange does not apply in your situation.
It does not matter what you do with the profits from a flip. Your profit is ordinary income to you when the flip is completed, even if someone else is holding your sale proceeds. No tax sheltering or tax deferral strategy is available to you. Your flip income is reported on Schedule C and Schedule SE of your tax return.
Consult a licensed tax professional in your area for specific details.
Thank You NK2. I do appreciate it.
Generally speaking, I am ultra conservative on any deal that might be construed as a dealer disposition. Before attempting to respond, let me ask a couple of questions to clarify your position.
First, let me ask how your wife has used the Florida condo over the past six months of her ownership?
Second question, why did you buy the Virginia land and who subdivided it?
We used the condo as a rental. It was on a rental program at the resort and has been rented about 30% of the time since March.
We initially looked for the land to have some water property near DC before it got too expensive in the future. The piece that we bought was deeded as a subdividable piece of land . The other parcels on the property were not e.g. you could only have one homesight on each property.
We decided to buy the larger property, subdivide it, perhaps sell one, and keep one lot. The sale of the one lot would provide enough capital to significantly pay down what we owe on the second lot.
Is that clear?
Thanks New Kid. You assuaged my fears. What makes it clear? The fact that we rented it for the condo? And the fact that we are holding on to the land?
I would like to hold them for a year but for three reasons. Regarding the condo 1) The out of pocket expenses for the next six months would be equal to the tax saving. This is assuming no appreciation which might be unrealistic assuming it has appreciated 25% in six months. Also, my out of pocket expenses (without accounting for tax benefits of interest deduction) are pretty tough for us. My original model was not conservative enough in terms of maintenance and charges from the rental company ($50 to fix a screen door, $60 every 4 days to clean it every time a renter moves out etc.).
Secondly, carrying the mortgage for the entire property in Virginia is also pretty hefty.
However, we are looking to move primary residences and it is going to be hard to qualify with all of this debt. I want to have enough cash for a 20% down payment and to be able to start looking October 1st.
Having said that, I still toy with the idea of waiting the year (March for the condo, July for the lots).
Thanks again.
Sell both, 1031 exchange the profit into another investment, i.e. a house for around the amount of the gain and rent it out. Now your eliminated two liabilities and created a cashflowing asset.
talk to a cpa about the exchange, I don;t see aproblem with the one in florida.
Second, you may get around some "dealer/tax issues by selling out of a S corp" I flip out of an S to avoid the 40% CG tax.
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Tax bracket Short-term rate Long-term rate
10% 10% 5%
15% 15% 5%
25% 25% 15%
28% 28% 15%
33% 33% 15%
35% 35% 15%
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Not Sure when it is good to use a C corp with the double taxation issue unless you are going to leave 50K a year to build up there.
AN S corp avoids the double taxation issue while saving you a ton in self employment tax....
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