Divorce, Equity Split, ...taxes?
Divorced last Fall. House was primary residence for over 10 years.
Wife still in house, but has bought out my equity share by borrowing cash from relative. I signed over a Warranty Deed last Fall at divorce, but received the cash this year.
No tax consequence to this transaction?
Now, the cash is over $10k and is deposited temporarily in bank CDs, and thus will be reported by bank to IRS. How do I file this tax year in order to foreclose the IRS interest in my sudden cash?
Finally, I want to purchase and rehab real estate with this cash. Should I convert it to some other venue...like the self-directed IRA, etc? I have no experience in this matter.
Thanks for the excellent advice here!
You have you deed as proof as to where the money came from and since it was a primary residence you should not have a tax obligation.
The best place to put your money is with an experienced investor until you are ready to invest yourself. As real estate investors, we are always looking for private money (you will see this if you start investing in real estae). Do a lot of research, reading, and learning so you can avoid costly mistakes. Start by going to your local REIA group and become a member. Network through that and build contacts. Good luck!
PS - Why put money in a CD earing 5% when you could invest with a real estate investor for 10-12%?
If your goal is tax free profits, do everything from within your IRA.
You can take an early withdrawal from your IRA. There is a 10% penalty (plus your ordinary income rate).
Lets say you were in a 30% tax bracket. You sold a property in the IRA for a $500,000 profit. You took a $50,000 early withdrawal. Your tax bill on the $50,000 would be $20,000. The $450,000 remaining in the IRA is tax-free.
Jeff,
A 1031 tax deferred exchange is governed by Section 1031 of the Internal Revenue Code. This is an exchange, not a trust.
You can Google 1031 exchange and get hundreds of hits for websites that have explanations of the exchange, how to structure it, the timeline, and the constraints under which you must accomplished the exchange to preserve the tax deferral.
There are two general rulesThe value of the replacement property(ies) must equal or exceed the value of the relinquished property(ies), and,All of your exchange proceeds must be reinvested in the replacement property(ies) acquisition.There are several specific rules that govern the type and use of the property that can participate in an exchange, the timeline in which certain actions must be accomplished, and a qualified intermediary must be involved in the exchange.
Yes, one or more relinqujished property(ies) can be exchanged for one or more replacement property(ies).
No, property you already own can not participate in the exchange. If you withdraw exchange funds to rehab a property you already own, those funds are withdrawn from under the exchange umbrella and become taxable.
I only pay about $750 to my qualified intermediary for each exchange. If your tax bill on the sale will be more than your exchange fees, then I would say that it may be worth it to do the exchange. The smallest profit I sheltered with an exchange was $25000. I used those exchange proceeds to acquire a better replacement property, which I later exchanged for two more replacement properties. As a result of these serial exchanges, I have sheltered almost $200K in capital gains. Imagine how much more property you can purchase when your capital gains is reinvested in your replacement property rather than paid to the IRS.
Your accountant is not an exchange expert AND is prohibited from acting as your qualified intermediary anyway. Best to consult a professional exchange facilitator for specific details as they apply to your situation.
Exactly as the other post said.
You CANT put the money into properties you already own. Also, you should fire the broad that you hired as an accountant and get someone up to speed.
You can take the money from the sale and with the intermeidary you have so much time to IDENTIFY the next property(ies) you intend to purchase. And then you are given even more time to close. Remember, the most difficult part is identifying the properties. Afterward, you have more than enough time to shop around, get the financing and close on the new properties. You can take the funds and spread them into more properties if you see fit, no problem.
Profit is calculated by subtracting your cost basis from your net sale price. Your mortgage balance has nothing to do with this calculation.
IF you are planning to 1031, you need to talk with an exchange facilitator first. There are exchange fees and certain documents that have to be in place before you go to settlement on the sale of your property. You also should have a 1031 exchange clause in your sale contract -- talk with an exchange professional before you do anything else.
i am selling a condo unit and i will realize a taxable gain of 145, 000 i want to 1031 into 7-10 multi`s using the 95% rule.
How is FMV determined by the IRS for this.
ASKING PRICE? SELLING PRICE? COMPS?
seems like the FMV is open to interpetation
Thanks
KJ
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The value for the like-kind replacement properties when utilizing the 95% identification rule is determined as of the earlier of the date the property is either received by the Investor or the last day of the exchange period (180th day). The value is considered to be the fair market value as of the appropriate date determined above.
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Quote:The value is considered to be the fair market value as of the appropriate date determined above. Bill,
Here is an actual example from my past experience. I purchased an REO. I got an as-is appraisal for $63K but my contract purchase price was only $49K. As I read your post, you are saying that for 1031 exchange purposes my property would have a value of $63K if it were the replacement property in a 1031 exchange, even though I only paid $49K.
Is this what you are really saying?
I would have said the value of the property, while estimated by appraisal prior to purchase, is established by the actual cost of the replacement property plus those closing costs that are an addition to basis.
[ Edited by DaveT on Date 08/08/2006 ]
Hi Dave,
You are absolutely correct. Fair market value is defined as what a willing buyer and seller will agree to. In your case, the price that you actually paid for the property would be the fair market value.
However, investors usually identify multiple properties and do not always close on all of the properties that have been identified, so there has to be a way to "value" the properties to make sure that the investor has complied with at least one of the identification rules.
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Also, one clarification. It is "potentially possible" to build on property that you already own as part of a 1031 exchange transaction. It is an aggressive tax planning position, but we have two (2) private letter rulings issued by the IRS; one in 2002 and one in 2003, where the taxpayer completed a 1031 exchange by building/constructing on property he already owned.
The structure is complicated and definitely not a plain vanilla 1031 exchange strategy. It will also have risk involved because all we have are two (2) private letter rulings to go by. [For those who are not familiar with private letter rulings (PLRs): An investor can request a PLR from the IRS and if issued the investor can rest assured that their transaction will not be disallowed by the IRS. The problem is that only the specific investor for who the PLR was issued can rely on the PLR. Another investor could use the exact same structure and it is possible the IRS could take another position and disallow the transaction].
The majority of the time the transactions outlined in the PLRs are only appropriate for much larger commercial transactions because of the risk and costs involved.
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