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With the tax season looming just ahead of us I have a question that I am curious of. I know that my accountant will have the final word in this, but that is still several months away.
In 2005 we sold a rental property holding the mortgage. We didn't really have to pay any capital gains tax as the money we received was less than the original purchase price. In 2007 the new owner sold the building and we were paid the balance of our sales and hence now we owe GCT. Things happened and we ended up, not really planning on it at the time, taking the money we received on the pay off plus another $10,000 and invested it into another rental property we own.
Since we already owned the rental property that we invested this money in, does this wash the CGT from the sale of the second rental property? Not sure if it matters or not, but we turned a 1 1/2 bedroom, 1 Bath cottage style home into a 3 BR 1 1/2 bath home. So we did add to the size as well as adding to the desirability.
Any comments?
thanks,
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
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you can only defer gain via a 1031 exchange, and NOT from fixing on properties you previously owned. You DID raise the basis of the property you fixed up by the amount you spent, but you DID NOT defer gain from the 'relinquished' (sold) property. You will have to 'pay-up' to the tax man if there is something due.
It sounds like your original sale was for less than purchase price, so.... you would not have a Capital Gain (unless you had 1031'd into it from a previous property in which you DID have a CG) Then you did an 'installment' sale that was paid off early due to borrower selling it.
I'm not sure where a CGT would come from, though you will be taxed on earnings from interest on the installment sale.
With the tax season looming just ahead of us I have a question that I am curious of. I know that my accountant will have the final word in this, but that is still several months away. In 2005 we sold a rental property holding the mortgage. We didn't really have to pay any capital gains tax as the money we received was less than the original purchase price.
The 'cost basis' is the focus number here not your purchase price.
Quote:
... In 2007 the new owner sold the building and we were paid the balance of our sales and hence now we owe GCT. Things happened and we ended up, not really planning on it at the time, taking the money we received on the pay off plus another $10,000 and invested it into another rental property we own. Since we already owned the rental property that we invested this money in, does this wash the CGT from the sale of the second rental property?
You have plus or minus three years to re-invest that money.
So it could have been used three years before you sold this property, to as long as three years afterwards.
Quote:
... Not sure if it matters or not, but we turned a 1 1/2 bedroom, 1 Bath cottage style home into a 3 BR 1 1/2 bath home. So we did add to the size as well as adding to the desirability.
Any comments?
thanks,
The end product needs to be 'like property'.
You can buy 'like property', you can build 'like property', or you can convert.
Rental property is not handled in terms of market value, rather in terms of 'cost basis'.
The assumption is that you are going to buy one property at a low cost, work to fix it up to a higher market value, and one day sale it for lots of dough. Then move on to the next property, reinvesting all of the profits. Each time that you flip a property you gain Worth and the numbers go slowly up.
Rental property everything is focused on cost basis. You adjust the cost basis each year with rental property. Depreciation verses improvements/repairs. It depreciates down, while you improve it up again. In theory maintaining it at an even keel. However there is no requirement to maintain an even keel. If you run the cost basis down to zero [or near zero] and flip then the entire sale price becomes 'capital gains'. If you had ran your cost basis up instead, then flipped you might have sold it for exactly the cost basis and shown no capital gains. Or you could have sold it for less than your cost basis and shown a huge loss.
You could very well sell a property and walk away from the sale with a good chunk of change, that does not show as a capital gain simply because you sold it for it's cost basis.
We have moved into some of our rental units for 181 days, partly to convert them from rentals back to SFRs, just to be able to clean up the cost basis. Since you are required to maintain all documentation supporting your cast basis all the way back to whenever to started depreciating it. Converting it to being your home for one filing, and then back to rental will remove the requirement for maintaining all of that previous documentation [if you hold a rental property for greater than seven years].
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
34,761 posts, read 58,170,577 times
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Quote:
Originally Posted by forest beekeeper
You have plus or minus three years to re-invest that money.
So it could have been used three years before you sold this property, to as long as three years afterwards.;...
The end product needs to be 'like property'.
You can buy 'like property', you can build 'like property', or you can convert.
FBK - please explain further the 3 yr issue, as that is outside a 1031 (Like-kind-exchange), which has strict rules and replacement periods, and seldom allows for 'building', as you can never personally touch proceeds (must be done through a facilitator).
I have examine your practice of 'converting to SFR', and that is a good option, but I ususally do commercial props that don't have residences. I would 1031 a Commercial income > a residential income, then start my 7 yr period.
At today's low LTCG rates (15% through 2009 vs 28-39%). I'm currently liquidating investment props and paying the taxes. I'm hoping to nab some 'distressed' props in late 2009 or 2010 that will rachet up my cost basis, and CG can start afresh.
Do explain the 3 yr thing, as I'm always looking for a new (legal) scheme.
Like you, I'm tax averse.
(why pay more than you are required)
FBK - please explain further the 3 yr issue, as that is outside a 1031 (Like-kind-exchange), which has strict rules and replacement periods, and seldom allows for 'building', as you can never personally touch proceeds (must be done through a facilitator).
We have done a series of Multi-Family-Residences [MFRs] during my career, buying each with a zero-down loan living in one unit while I was stationed in that area, then a few years later transferring elsewhere. We collected them in different states on both coasts as well as overseas.
I recall that once we had a five year plus or minus window for rolling over your capital gain, then it was shortened to three years +/- unless you had a good reasoning for why you could not do it [like overseas employment].
We have bought a MFR, then sold a previous MFR, then used the money from the sale to pay-down the other MFR's principle.
Or obviously you could hold onto it in a CD, only paying the interest from the CD, until you found the right MFR that you wanted to dump that money into.
I just dislike the idea of going a period of time without any MFRs, so I would prefer to buy another before selling the previous one. Too many folks out there want to be renters, willing to pay rent, each month that goes by is rent receipts wasted if you are not holding a few rental units.
We have always done the books ourselves, and have never used a 'facilitator'. I thought that it was a part of maintaining an active engagement in each property.
We kept each schedule 'E' showing a negative for the three years out of five, and then showed $1 profit the remaining two years. As we needed the tax sheltering while I was earning a much higher income in my career. I know that now it has changed to 2 years out of 3, but it has also changed to a guideline and is no longer a rule. Now that I am retired, I do not need the sheltering any longer, as my pension income is much lower.
We have been audited three times over the years, however our 'I's were dotted and 'T's crossed, we came out smelling of roses each time. So I assume that we did not mess anything up too badly.
I retired in 2001, when I was booted from my career due to 'high-year-tenure' and my pension started up. We sold off all but one MFR and used the proceeds from the others to pay-down most of the remaining MFR's principle.
Quote:
... I have examine your practice of 'converting to SFR', and that is a good option, but I usually do commercial props that don't have residences. I would 1031 a Commercial income > a residential income, then start my 7 yr period.
Always something to consider.
Quote:
At today's low LTCG rates (15% through 2009 vs 28-39%). I'm currently liquidating investment props and paying the taxes. I'm hoping to nab some 'distressed' props in late 2009 or 2010 that will ratchet up my cost basis, and CG can start afresh.
2010 - 2011 the navy will be closing a base near me [NAS Brunswick], lots of housing will be on the market for pennies on the dollar. A smart man would snag a few by the block, in a few years they will all be filled again with renters.
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