Need Help With Capital Gains Tax Defferal
Im in a situation that Id like to get some information / advise on.
I owned and lived in a townhouse for 17 months straight after which I sold it. The settlement attorney asked me to fill out a 1099S form which I believe she has already sent into the IRS.
Now, prior to my selling the house I had put a contract down on a condo which seemed like a good investment oppurtunity. I was planning on living in the condo, but the condo people took too long in construction. I wanted to benefit from the low interests rates and so I put another contract down on a single family home, thinking that I might rent out the condo and keep it for two years before selling it, while staying in the single family home. So heres the jist of it all
12/2001 - 04/2003 -- lived in townhouse
08/2002 -- contract on condo
10/2003 -- condo not ready in time, contract on single family home.
Now my question is, can I avoid Capital gains on the sale of my first house? Or defer it to the condo or the single family home?
Can I use a 1031 exchange in this situation? If so, what do I have to do?
I would prefer to rent out the condo unit for at least two years before I sell it or exhange it. Can I exchange it after two years?
Any help in this situation would be appreciated.
Please read my article
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&sid=415
[ Edited by myfrogger on Date 11/18/2003 ][ Edited by DaveT on Date 11/18/2003 ]
Quote:Now my question is, can I avoid Capital gains on the sale of my first house?No. But if you only lived in it for 17 months, how much profit are you talking about sheltering? The sale date is important here, too. If you sold the townhouse on or after May 6, 2003, your maximum capital gains tax rate is 15%. If you sold before May 6, your long term capital gains tax rate is 20%. Even if you only made $10K after all your selling expenses, your capital gains tax liability will be no greater than $2000.
Quote:Or defer it to the condo or the single family home?No. The two-year rollover (primary) residence replacement provisions of the tax code were repealed in 1997.
Quote:Can I use a 1031 exchange in this situation? If so, what do I have to do?No. It is way too late; first, because you already sold the townhouse six months ago, and secondly because you have taken constructive receipt of the proceeds of the sale. The time to set up a 1031 exchange is before the sale takes place.
Quote:I would prefer to rent out the condo unit for at least two years before I sell it or exhange it. Can I exchange it after two years?Yes, if you only use this property as a rental once you buy it. You are free to use it as the relinquished property in a 1031 like-kind exchange whenever you want to after you have established an investment use for the property. I suggest one year is sufficient. There is no minimum two year holding period involved. My only caution is that it only makes sense to do a 1031 exchange if the property has significant capital gains to shelter. How much profit will you have to shelter after only two years of ownership (rhetorical question), is it enough to make an exchange worthwhile when you consider the exchange setup and escrow fees?[ Edited by DaveT on Date 11/18/2003 ]
In reading through your timeline, it appears that you are homeless. You sold your townhouse, but have not purchased either the condo or the SFR yet.
myfrogger and DaveT
Yup im homeless right now, staying in with family until the SF is ready two months from now....settling on the condo next week.
Seems like the townhouse is history, I made 30K on it...so I guess I'll have to pay the taxes on the gains...unless ofcourse I can show that, due to unforseen circumstances I had to sell. Well I had to cuz my wife started school, which was an hour away, so had to get the condo (closer to school), 15 minutes away also next to the metro rail at walking distance. So its bound to appreciate a lot....Its already appreciated 60K, and part of it isn't even complete yet....
Also, the townhouse was a health hazard with mice running around in the basement and kitchen....had to move out of that place..
Now that uncle s already has the 1099s that was filed when I sold the townhouse..can that be changed when I do my taxes next year?
Based on the above unforeseen circumstances can I get it prorated at 17 months?
Mice can be handled with exterminators and traps. Your "unforseen circumstances" did not create a hardship. Instead you sold for a profit without purchasing a replacement home.
Did you really "make" $30K, or did you receive $30K at the settlement table? If at the settlement table, then go back to your HUD-1 from the original purchase. Take your original contract purchase price, and add most of the closing and settlement costs (most everything except prepaid taxes, interest, insurance). This is your cost basis.
Now take your sale proceeds (your sale price minus selling expenses, and closing costs), and subtract your cost basis. Also subtract the cost of any major improvements you made to the property such as landscaping.
The final answer is your taxable profit. Is this number still $30K, or something less?[ Edited by DaveT on Date 11/19/2003 ]
Quote:Can I use a 1031 exchange in this situation? If so, what do I have to do?I overlooked a very important point in my earlier response to your question.
The townhouse was your primary residence. Your primary residence is not eligible to participate in a 1031 exchange, neither as the relinquished property nor as the replacement property.
To start off 31K were the sale proceeds.
Ok here is a slight twist to the problem then....I had 25K debt on credit cards.
My father who is NOT a US taxpayer (foreign money) gave me 25K to pay off my credit cards, and asked that I return the money to him when I sell my house.
I got 31K from the sale of the house...paid dad up with 25K, and paid off my financed car with the remaining 6K...so I used it all up. (not very bright! I know...but I had to cut down on my monthly expenses to be able to save-up for the condo I had put a contract down on the year before. )
Does this affect taxes in any ways?
No. Borrowed money that has to be repaid is not taxable income, so you do not have to report the $25K you received from your father.
Once again, if you received $31K from the settlement attorney your taxable profit may be less if you made a downpayment when you purchased, and if you made any capital improvements. Additionally, the amount of your original mortgage loan that you paid down with your monthly payments are not taxable capital gains either.
Your tax bracket and the date of the settlement will also affect your capital gains tax rate.
If you went to settlement before May 6, 2003, then your capital gains tax rate is 10% if you are in the 15% tax bracket or lower
20% if you are in any marginal tax bracket higher that 15%.
If you went to settlement on or after May 6, 2003, then your capital gains tax rate is 5% if you are in the 15% tax bracket or lower
15% if you are in any marginal tax bracket higher that 15%.
Consult a licensed tax professional in your area for specific details.
All of this has been great help.
Thanks. DaveT and MrFrogger for all the help.
This place is really! cool
Do the members also share hot tips on hot properties for investment on this forum as well? I think I might just subscribe to this site permanently.