Seller Cancels My 1031 Upleg-now What?
This is an ugly scene, I sold my rental propty (~$1mil) back in feb 03 and funds are being held by 1031 accomodator. Identified 3 properties as potentials, opened escrow on one commercial bldg. 45 day period ended mid april, 180 deadline ~mid Aug 03
Appraisal done, paid for and loan was applied for and in process, minor details were being ironed out. Everything was fine until level 2 environmental was requested by lender based on findings of level 1 environmental. Commercial prop had dry cleaner on premises maybe 20 yrs ago. Loan was approved subject to level 2.
Seller decided to pull pending sale on technicality that escrow had not closed by contract date. I can only surmise that seller had knowlege of drycleaner and had failed to disclose, or was afraid of potential cleanup expense. Alternately, seller may have felt agreed upon purchase price was too low (sale prices keep rising)
Do I have any recourse?
Even if the alternates were available for purchase, there is really not enough time to close escrows on the other 2 identifieds, one is supposed to be in escrow (not me) and the other is no longer on the market and seller can not be contacted.
Looks like I can't do a 1031...tax issues
assume basis is 350K, deprec was $300K, deferred passive loss rollover $200K on tax return, $1,000,000 sale price
my guess is $550 cap gain & $100K recapture
Q: Is my sale date the day the funds are released from the accomodator or the actual sale date? I ask cause the cap gains tax reduction takes effect on transactions after ~mid May
Q: I had expenses of prop inspection, loan processing, etc. How do I deduct these expenses on tax return? Are they added to basis of sold prop?
Q: Does anyone have any creative ideas on how to salvage this mess?
Additionally, during this year '03 I became beneficiary of an estate, my share after estate taxes likely to be $650K. What is that going to do to my tax situation?
Sigh, HELP!
With the type of $$ you are talking about here, you are definitely in need of a good tax attorney. I would ask around and see who you can find. In addition, once you find one they need to be consulted before any deals are undertaken to guide you on the process to ensure your tax liability is minimized. I'm sure you'll find their fees are money well spent in the long run.
Good Luck![ Edited by SteveCoff on Date 06/30/2003 ]
Unfortunately, it sounds as if you are right. Unless you can close on one of the properties that you have identified your 1031 exchange will fail.
You capital gain will first be applied toward your depreciation recaputure at the 25% rate and then toward your capital gain tax rate.
The tax is triggered on the date that your qualified intermediary distributes the funds to you, so you will qualify for the reduced capital gain tax rate. This issue is pursuant to the installment sale rules and also covers 1031 exchanges that open in one tax year but fail in the following tax year with the proceeds being distributed (and taxable) in the following tax year.
If you need a referral to a tax or real estate attorney that specialized in 1031 exchange transactions, please contact me directly and I would be happy to provide you with a referral.
[addsig]
thanks for the tax analysis wexeter.
at least it sounds like I can count on the reduced cap gains tax rate once the deprec recap is accounted for.
Any idea if I can add to prior basis or claim as expense the costs I have incurred while trying to consummate the 1031 exchange?[ Edited by chimeroid on Date 07/12/2003 ]
one question I have is " can you find an alternate property that isn't necessarily the "goood deal" but when faced with high taxes might be a better place to put a couple hundred k than in Uncle sam's wallet?
Stockpro99,
Unfortunately for chimeroid, if he cannot complete the purchase of at least ONE of the three properties he identified within the first 45 days following the sale of his relinquished property, his exchange fails.
He is not allowed to substitute another property after the 45 day identification window has closed.