Sale of Rental Property - Help...

"Daniel" wrote

A Section 1031 "like-kind" exchage would need to be done for the full sales price (closer to $600,000+) to defer the gain on the sale. There isn't any mechanisim to prorate the gains into a deferal.

NOTE: It may be possible to sell one unit (if it's been condo'd) and defer that gain using a like-kind exchange for the duplex half that will be rented. Talk to a 1031 expert in your area to see if it's possible to do that.

-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net

Yes there is a way, but it must be carefully structured. You can do a 1031 like-kind exchange when you sell your property. But you must use an intermediary to facilitate this. If you take possession of the money, even for a minute, you will have to pay capital gains. Once you close on the sale, you have 45 days to identify one or more replacement properties and 120 days to close on the sale of at least one of them. Then you must rent it out for a resonable length of time. Most professionals advise at least a year of renting. Then you can move into it and make it your personal residence. If you live there at least two years, you can then sell it and exclude up to $250,000 in capital gains ($500,000 if MFJ). But you will have to recapture any depreciation you took or could have taken while renting it out. If you decide to just pay the tax, your tax bracket includes the income from the LTCG.

Not quite that simple. I presume your "triplex" was rented out, during the time you owned it. That means depreciation, so there will be more complications that a simple subtraction of the cost basis (It's called "recapture.") If the deal hasn't yet been completed, there is the option to investigate a 1031 exchange -- for "like-kind" rental property ... but that wouldn't fit your plans as described. The maximum LT gain is 15% (though the recaptures will be taxed at a higher rate). I would recommend you consult a professional for a more precise consideration of your options, before the closing. Bill

First of all, when you sell rental property, there will likely be depreciation recapture taxed as ordinary income. So, its not likely to be all LTCG. One thing you may want to look into is a like kind exchange. But, I don't know if you plan to live in the newly acquired property if it would qualify for a like kind exchange. You need to consult an expert in that field. ___________________________________

-----> real address on hobokeni or hobokenx

The property currently qualifies for a 1031 exchange but not all the gain can be deferred. Pushing $600K into $300K will leave some exposure to boot (taxable), especially with mortgage relief not bought off with additional cash. The new property (which has already been identified) needs to close within 180 days of the close of the old one being sold. Then you must operate it as a rental for at least 2 tax years to show rental intent. You "may" move into it later but you must hold it for at least 5 years before being able to use the homeowner's exemption $250/$500K when you sell. Please contact a 1031 specialist at a qualified intermediary firm for specific advice. Linda Dorfmont E.A., CFP, CSA

No, that's not correct. Under Sec. 1(h) you get the benefit of the lower of the regular tax or the tax figured based on capital gains. The way the tax based on capital gains is figured, it is essentially the sum of the regular tax on your taxable income, less your net capital gain, plus 5% (0% for 2007) of the amount of adjusted net capital gain that is less than, or equal to, the (positive) difference between the threshhold amount for the 25% marginal rate bracket ($31,850 for 2007) and your non-capital-gain income, plus

And if you can do all that, thank an industrial engineer who designed the worksheets and forms to get you through it one step at a time. Linda Dorfmont E.A., CFP, CSA Fellow, Institute of Industrial Engineers.

But that's only the lowest rate, on (part of) the capital gain. Somebody with $0 ordinary income, plus $10,000,000 capital gain, is only going to be in the 0% bracket for a bit of the gain. (Otherwise it would pay to quit your job in the year you sell all your Google stock and original-issue Microsoft.) Seth