Tenants In Common And 1031
Another newbie with a problem.
My partner and I bought a condo 10 years ago and she wants out in a couple of months.
She lived in it as her home for several years.
I always took half of the tax credit as it was a rental property for my half interest.
What's the safest way not to get hit with any capital gains taxes etc...
Can I use the 1031 form with my half of the profit?
I want to try to build off this little gain by putting it into another property if possible.
Thanks for your time,
Jack
Jack,
then your maximum capital gains tax on your profit would be 15%, and 25% for depreciation recapture. If this potential tax liability is less than $1500, you may want to reconsider a 1031 exchange as it may cost you that much anyway in exchange fees.
You say, "I want to try to build off this little gain." How little is your partner's half of the gain. Is it possible that you could just pay her for her equity and keep the property as a rental? Do you want to do this?
If the answer to this question is no, then you can use a 1031 exchange to shelter you share of the profit on the sale of the property. 1031 refers to the section of the tax code that governs tax deferred exchanges -- it is not a "form". There are specific rules that must be followed.
If your gain is small (you did say "little gain"
Thanks for the response.
I guess little equals about 60k.
In Calfiornia that's just a little on real estate. I dont have 60k to give her.
Maximum capital gains tax on your profit would be 15%, and 25% for depreciation. so that is 40 percent?
This is my one time I'll have this chunk of change available in the near future, so I dont want to give that high a percentage away. no yet.
I really dont want to keep the condo, I much rather put what I can into a new track home and try to sell that later and do it again etc...going up in value?
Also have a dilemma about financing this new prospective house.
If I say it's for my home the finance rate is cheeper than if you say you want to invest in a rental property?
So I can take my 60k and do a 1031 exchange? I have to use some kind of middle man company so I dont take possession of the money, Right?
This is kinda owerwhelming right now, I have to find a Property transactions For Dummies book to learn how to do this kinda dealing..
I just found this site so I also will do alot or reading posts.
Sorry if I'm not saying what I'm trying to do right. I know there's a method.
Thanks agian.
Jack
You might consider buying her portion with a note either secured or nonsecured. You could have immediate ownership, but pay her a monthly payment for her interests in the property rather than a cash out.
You might also be able to refinance and give her her $60K that way. You may want to take into account half of the expenses that will be incurred when you do sell and deduct that from her $60K.
Quote:Maximum capital gains tax on your profit would be 15%, and 25% for depreciation. so that is 40 percent?You buy an investment rental for 100K and after 3 years sell for 150K. This 50K profit from appreciation is taxed at 15%, for a $7500 capital gains tax. During your three year holding period, you also took 10K in total depreciation expenses on your annual tax return. This depreciation is recaptured at 25%, or a $2500 tax. Your total tax liability is $10K ($7500 + $2500), for an effective tax of 20% in this example. For a more detailed discussion of how depreciation is recaptured, go to the articles section and read the article on this topic.
Quote:Also have a dilemma about financing this new prospective house. If I say it's for my home the finance rate is cheeper than if you say you want to invest in a rental property? All I will say here is loan fraud can be costly. Intentionally lying on your loan application is loan fraud. If you are seeking a federally insured loan and you are caught, the penalties include prison time and a fine up to $250K. Additional consequences for a felony conviction include loss of voting privileges, severe limitations on your ability to obtain a security clearance, and greater difficulty in being elected to public office.
With interest rates so low, the difference in the actual loan payment between an owner occupied loan and an investor loan is too small to worry about affordability.
Quote:So I can take my 60k and do a 1031 exchange? I have to use some kind of middle man company so I dont take possession of the money, Right?Right, you will need to use a qualified intermediary. In my recent 1031 exchange, my bank's trust department served as my exchange escrow agent for a $350 fee.
Quote:This is kinda owerwhelming right now, I have to find a Property transactions For Dummies book to learn how to do this kinda dealing..There are a few exchange facilitators in the marketplace as well. Put "1031 exchange" in your search engine to find a lot of companies that will send you free literature explaining the process.
Guys,
I appreciate the time you took to answer some of same old questions I'm sure you get all the time.
hibby76, That's an idea I may have to go with if I can't find a place to transfer that 60k to, as condos are kinda slow appreciating vs the homes, but in a pinch...
DaveT, Wow! what detailed answers.
My I depreciation expenses were for 15 years on this property so the 60k will look alot smaller if I dont use the 1031 exchange. Can't afford not to use it.
The fraud part on finance scares the heck outa me. Read you loud an clear.
Don''t want no part of that.
I was thinking of putting my brother in the place, but I guess that's still considered investment vs home.
Kinda have tunnel vision on saving as much as I can to build up for the future.
My one shot thing. Wrong Idea. Sorry! This is like my first dance..
I'll keep reading and see how/who people use, such as tax account vs realestate lawyer etc...to keep everything above board.
Great site and very helpfull.
Thanks,
Jack
Quote:I was thinking of putting my brother in the place, but I guess that's still considered investment vs home.Jack,
Talk to your mortgage broker or your favorite loan officer. If a family member physically occupies the house as a primary residence, you may still qualify for owner-occupied financing.
I am getting ready to explore this myself. I am thinking of buying a place for my father to live and I am expecting the loan underwriting guidelines to be a little easier if I can apply for the mortgage as an "owner-occupant" based on occupancy by a qualified family member.
JackT is right on the money. One clarification. Your gain on the property will be first allocated to your depreciation recaputure tax at 25% and then any remaining gain will be taxed at your capital gain tax rate.
[addsig]
Boy, Those taxes can really take a bite.
Have to avoid that for now.
Thanks again everyone.
Jack
I thought depreciaton was a good thing???
If you are being taxed at 25% for depreciation and 15 % for capital gains wouldn't you just rather not claiming any depreciation and only being taxed the 15%??
****Must Reach Senior Investor status before posting URL's*** at 60K gains with 20K depreciaton
(20 x 0.25) + (40K x 0.15) = 11K withheld
or only 9K for pure capital gains and no depreciaton claim.
I know i'm missing something here and i know claiming depreciaton is good, but i'm confused with a post a couple posts before...
rynosaurus,
Claiming the depreciation expense is optional. If you operate a rental property and never claim the depreciation expense to which you are entitled, you are free to do so.
On the other hand, when you sell the investment rental property, paying the depreciation recapture is mandatory. The IRS will assess the depreciation recapture tax against the depreciation taken, or the depreciation you should have taken, whichever is higher.
Depreciation is sort of a present value and tax rate comparision/calculation. When you write off depreciation on your taxes your are saving taxes (cash flow) each year and able to reinvest the savings. This still makes sense, depending on your tax bracket, in the long run due to the present value calculations (money now is better than money later).
Also, we would be happy to discuss your 1031 exchange needs. We have administered thousands of 1031 exchange transactions as a qualified intermediary and I have been in the 1031 exchange industry since 1986. Just drop me an email and we can chat.
[addsig]
Quote:I thought depreciaton was a good thing??? If you are being taxed at 25% for depreciation and 15 % for capital gains wouldn't you just rather not claiming any depreciation and only being taxed the 15%?One more thought to complete my earlier answer. Judging from your question, I would assume that you are in the 25% tax bracket. Therefore, consider that your net rental income is also taxed at 25%.
Depreciation taken now offsets rental income, and reduces (dollar for dollar) the amount of rental income to be taxed. So your depreciation taken now, reduces your tax liability by 25% of the depreciation taken.
In a later year, when the depreciation is recaptured, you are only paying back the income tax that you would have paid in the first place. The difference now (as Bill Exeter points out in his post) is that you are paying it back with inflated dollars.
If you don't take the depreciation, you end up paying taxes on that money twice: the first time when you pay tax on your full rental income without the depreciation offset, and the second time when the depreciation you should have taken is recaptured.