Capitol Gains Tax in NJ (RE agent, contingency, 2009, agents)

[NewHomeHappy]

I'm sure this has been asked before but I can't seem to locate the thread.

Regarding NJ only, is there a legal way to avoid or to lower the dreaded Capitol Gains tax? Any catch 22 or angles or fine lines to dance?

My situation is simple, I'm selling 2 investment props. Single fam. homes, rentable, had them for approx. 1 yr & 5 yrs. One home has an offer on the table (cash) nice and I'm holding off on selling the second home.

Question: Is is better to wait until next year to sell 2nd home?

I hope I've explained this clearly. I'm open to any ideas.. Some ballpark figures below so I have a better idea of the ouch-impact.

*My tax guy is in the hospital, so calling him at this time would be heartless.

House#1 purchased in 2005 for $160 selling at $340 BUT I put approx. 60k worth of renovations into this baby & have receipts to prove it.
House#2 purchased in 2001 for $180 selling at $320 BUT I put approx. 10k into this house too.

[Gretchen B]

Are you wanting to reinvest or just unload your current properties and pocket the cash? If you're wanting to reinvest and defer (and sometimes even eliminate) capital gains tax, then you probably want to consider doing a 1031 exchange. However if you're needing to cash out, federal long term capital gains tax rates are favorable for the next couple of years (talk to your tax advisor about the details). It's always best to consult your accountant/tax advisor before you proceed, because once a property is sold, there really isn't anything you can do to change your tax liability at that point. If you can't stall things, I'd at least have your realtor put a contingency in the contract allowing you to consult your financial advisor within X number of days. That way you won't lose out on the sale but retain a way out in case your tax guy says the timing isn't right.

[sunsprit]

In a very general sense, your capital gain on investment rental property is the gross selling price less your purchase cost and capital improvements.

There will be adjustments to this figure due to depreciation, expenses, and rental income that you've probably taken on your prior years taxes.

But with this much upside in these houses, I'd bet you will have some capital gains tax liability.

The only simple way I know to defer ... not escape ... capital gains taxation would be a 1031 exchange. You need to visit with a real estate specialist in this area and present your situation to them; they may have viable options for you to invest in. A lot depends upon if you're seeking to re-invest your real estate capital or to cash out for other purposes.

The only person who can tell you where you stand on this will be an accountant who knows your personal tax situation and tax history on these properties.

If your regular accountant is out of the picture, is there an associate who can assist you? If not, it's time to consult with another firm ASAP.

[NewHomeHappy]

Thanks for the replies. We are cashing out. Not reinvesting. I'm looking into contacting my other accountants office to further pick his brain; before the contracts are signed. Those were Good ideas.

BTW: I am not using any RE Agents. This is my deal/gig. Also, the potential buyer is offering me g*a*s*p.. CASH. Yes, real honest to god Cash. No mortgage no baloney.

Any ideas on how you would handle a cash deal differently?
I hope it's not all in ones.

Keeping my fingers crossed that this comes to fruition.

[sunsprit]

From a tax event standpoint, it doesn't matter to you if the buyer brings folding money, coins, or certified funds or wire transfer, or a mortgage payout.

The buyer receives his value in exchange for your value. You walk away with funds.

[1031pro]

You mentioned some capital that you invested into the properties. I wanted to point out to you that only major improvements such as additions would increase your property basis. I can understand that many times people want control of thier funds and therefor decide in favor of cashing out and paying taxes. The possiblility of refinancing after the exchange, which is not a taxable event is often overlooked. If one plans to reinvest into more real estate the tax deferred exchange is an excellent wealth building tool.
Smiles,
Kimberly Tomlin-Ladd

[EANJ]

As said, 1031 defers the tax -- it does not avoid it. Getting cash, accessibility might address one requirement, but it has nothing to do with the tax. Many people feel that a tax deferred is a tax avoided. OK, many people feel the tooth fairy exists too, LOL.

If you are going to play straight, then you really need to look at what a 1031 can and can't do for you. Don't use it because you don't feel like writing a check -- why? Because there are several strategies that do exists to reduce or eliminate the tax liability on the sale of appreciated real estate. You need to work with a very qualified, expert advisor.

If the 1031 appears to be feasible for you -- have an exit strategy. Don't use it as a band-aid or procrastination device.

As far as timing, other than a very fast tax law change -- selling on Jan. 2 2008 gives you until April 15, 2009 to pay the tax (aside from estimated quarterlys, etc. which are specific to your own situation). Selling just a few days earlier on Dec. 31 -- you must pay the tax 4 months later on April 15, 2008.

Good luck.