1031 exchange house gifted my mother

My mother gifted me her primary residence in 2001 with no  exchange of any money.  I have never lived in the house during this time;  my mother has.  She moved out 7 months ago.  We are selling the house and  there is not much to claim for capital improvements.  The house was  purchased in 1963 for 25K.  It was worth about 485k when she gifted it to  me and it is selling for 705K.  Can you help?  Thanks

 

Dear M:  Your question is more complicated than you think.  1) Your basis (starting point for calculating gain) is a carried forward basis from your mother.  This is because she gifted it to you.  Her basis and therefore your basis is $25K.  2)  If you have held the property for investment since you received it as a gift in 2001, then you can sell it and 1031 exchange it into new investment property, and defer the tax liability.  3) The big question is:  Have you held it for investment?  The reason I ask that is that I presume that you allowed your Mother to live there for little or no rent.  That doesn't make it look like an investment.  4) You should take the position that you held the property for investment and then gifted to your Mother the value of the rent that anyone else would have paid to live in the house.  5) Because you have never lived in the house IRC section 121 does not apply. 6) If you do not do a 1031 exchange then you will be liable for tax on the full gain ($705K-$25k= $680K)   An estimate of the tax on the amount, state plus US is $136K.  This is a lot of tax and you should certainly consider a 1031 exchange.  I hope we can be of help.  Sincerely,

 

Steve Hickox
Attorney / President

1031 exchange and depreciation

Hello, I have a property I'm looking to sell and have some  questions about the 1031 exchange.  The property that I'm looking to sell  was originally 71,400.  The selling price will be about $90,000.  I figure  about $7,000 for cost of sale.  One of my questions is what is the  depreciation amount?  How do I figure this?  From the 1040??  I don't have  any improvements that I can think of.  Do you know of any state taxes in  AL?  I'm currently not living in AL, so I imagine I don't have to pay any.  Is this right?  I like the fact that your company is in CO.  So I do plan  to do business with you.  I appreciate your response.

 

Dear M: 1) Your depreciation allowance is an annual allowance.   If you do not have a running total then you will have to go back to your tax returns starting with your year of purchase.  Looking at your schedule E you then add up all depreciation taken over the years.  This is your accumulated depreciation.  Subtract the accumulated depreciation from your purchase price to arrive at current basis.  2) The general rule is that you must pay tax in the state where the property is sold and then if the state in which you reside has a higher state tax you pay the additional amount to the state where you reside.  However, if you do a 1031x then you defer both state and federal taxes. 

Steve Hickox
Attorney / President

1031 exchange the basics

Dear 1031x:  My wife and I own a condo in NJ that we purchased in 1987 for  $90K.  We've rented it for the last 14 years and plan to sell for $260K in  January 2006. Realtor fees are 5%. How can we qualify for 1031x treatment  and roll this into a new investment property and pay minimal taxes?

Dear Dan:  You need a company like ours to escrow the sale proceeds between your sale and repurchase.  You must trade equal or  up in value (minus costs of sale) and you need to reinvest all exchange proceeds.  You can purchase any real estate within the US and as long as it is held for investment.  You can by one or more properties as replacement.  You must ID the replacement property(ies) within 45 days after you sell and complete the purchase(s) within 180 days of your sale.  If you follow all of these rules you will defer both federal and state income taxes. That's it in a nutshell.  Our fee is $400 for a one for one 1031x.  May we be of service to you?

Steve Hickox
Attorney / President

1031 exchange subsequent transfer

Hello,

I have acquired a property via an exchange last year.  I have an offer by someone to buy it from me.  Can I do another exchange with this property and defer the gain from the past year, or am I limited?  What is the best
strategy?

Thanks in advance,
C

 

Dear C:  Yes, of course, exchange again.  Only please use us this time.  Sincerely,

Steve Hickox
Attorney / President

1031 exchange oil

Dear 1031x: I noticed on your web site that it's possible to exchange  working or royalty interest in oil or gas production for real estate.  Can  one exchange real estate (apartments, etc) for working or royalty  interests in oil/gas production?

Dear R: Royalty interests are also known as mineral interests.  They are perpetual and transferred by deed.  As such they are real estate and therefore "like kind" to other real estate.  Working interests are less clear as they are more contractual in nature.  We are working to supply oil and gas interests as replacement property.   Sincerely,

Steve Hickox
Attorney / President

1031 exchange vacation homes

We bought a condo on Hawaii, in February, 2004.

It's been solely used as a "vacation rental" .

The purchase price was $250,000.

We have a first mortgage for $225,000 and a HELOC for $25,000.

Obviously, we didn't plan to buy this place, but it popped up.

It's a great unit, and we were in the right place at the right time, with great credit, and a terrific loan guy.

Anyway, we've recently been contacted by several agents on Maui with qualified buyers looking for a unit in our building. The current market value is about $475,000 - $499,000 -

So if all goes well, we're looking at a possible gain of $225, 000 - $250,000.

(less the agent's commission of course).

Here are my questions!

Last fall, (November of 2004) we put "holding money" down on a pre-construction condo/vacation project in Florida ....

HOPING (and praying) the timing on selling the Hawaii unit would work out for us.

The purchase price of that unit will be $369,000.

We were recently notified that the project could be ready for occupancy as early as June, 2006.

So, question number #1 -

Do these two properties qualify for a 1031 exchange?

(Oh please say yes)

And, if so, what are the time constraints?

I know you have to identify a unit .... and buy a unit ..... all within a certain amount of time .....

But that's where I get really fuzzy.

And if they do qualify ....

How does that work tax wise?

Do you just roll the money into the other property, tax free?

Or do you pay a lesser amount - Or what?

Basically, if we could sell the Maui unit in the next couple of weeks .... could we "hold" that money to purchase the Florida property?

Or would we need to delay the sale a few more months to be in some kind of safety zone?

I've tried to become as informed as I can on 1031 exchanges, but I'm still not really sure of how this all works.

I do know you need to "give" the exchange to a 3rd party (such as yourself) to handle the process, and that the money has to go into a trust ~ or something.

Anyway ......

CAN YOU PLEASE HELP ME?

We are VERY serious about doing this, and I would appreciate an answer to these questions as soon as humanly possible.

Anyway, thanks very much in advance.

You have a very nice, informative site and blog, and I look forward to hearing back from you!

All the Best,

Dear M: Thank you for contacting us. I will try to answer your questions as succinctly as possible. 1) Vacation homes are a gray area. They must have been held primary for investment and only secondarily for your personal pleasure and use in order to qualify for 1031x. In your description it does sound like you thought you were getting a great deal and were expecting a large gain on the HI property. Whatever you can do to bolster your investment intent, at the time you bought HI, will help. Having said that we do many vacation home 1031x transaction as there are many of them in Colorado. 2) Fl must also be held for investment. You must purchase FL within 180 days after you sell HI. You can contract to sell HI now, but do not close on HI until you are sure FL will be ready within 180 days. 3) When you trade down in value as you describe you are taxed on the difference. You can avoid paying this tax if you buy a second replacement property within the time limits, or you can just pay some tax. In that case you would have a partially deferred 1031 exchange. 4) Yes you do need a Qualified Intermediary (our company) to hold your exchange proceeds between your sale and your purchase. I hope we can help when you are ready. Sincerely,

Steve Hickox
Attorney / President

1031 exchange sale without repurchase

I live in Japan.   I have been here for 7 years.  I have a townhouse in  California that I have a loan on.  I'm building a home in another part of  the state and have taken a 2nd out on my town house to finish paying off  the new house.  I would like to sell the townhouse to complete payment on  my new house.  Do I have to pay capital gain tax.

Dear G:  Unfortunately your question can be answered in one word. YES.  Remember gain realized and size of mortgage have little or nothing to do with each other.

Steve Hickox
Attorney / President

1031 exchange capital gain exclusion

Dear 1031x: Why does your site's 'calculating capital gains' calculator not  include the $500K exclusion?  Where does it apply in calculating capital  gain from a home sale?

Dear Carol:  Thank you for contacting us.  The reason that our calculator does not include the $500K exclusion is because that exclusion only applies to the sale of principal residences.  Our website deals primarily with the 1031 exchange of investment property and not with the sale of principal residences.  We designed the capital gains calculator to help customers estimate their tax if they decide NOT to do a 1031 exchange.  Sincerely,

Steve Hickox
Attorney / President

1031 exchange conversion to principal residence.

Dear 1031x: My wife and I completed a residential rental property 1031  exchange in December 2003. We rented it soon thereafter, in February 2004  and it has been rented now for 22 months. We want to move into the house and make it our primary residence. How long  do we need to wait to do this so as to avoid capital gains taxes on the  original property sale? How soon after taking residency can we sell the  house and be subject only to capital gains taxes on it as our personal  residence? Thank you for your consideration.

 

Dear James:  Thank you for contacting us.  Under 1031 both properties must be held for investment.  Investment intent is determined at the time of purchase of the replacement property.   After you purchase for investment, if an unforeseen change in circumstances occurs in your life then you can convert your investment property to your principal residence.  There in no specific time frame specified.  Longer is better.   After conversion you must own the property for five years and live in it for two of the last five years in order to qualify for tax exemption under code section 121.   If you move into your replacement property now, then your five year period would run through December 2008.   I hope this helps.  Sincerely,

Steve Hickox
Attorney / President

1031 exchange multi-state tax

Dear 1031x: If I do a 1031 exchange into another state and later sell the  property.  In which state do you pay the capital gains?

Dear K:  Thank you for contacting us. The general rule is that you will first pay tax in the state where the property is located.  Then, if the tax rate in the state where you reside is higher than the tax rate in the state where you sell, you will pay the difference in rate to the state in which you reside.  I hope you will chose us for your 1031x needs. Sincerely,

Steve Hickox
Attorney / President

1031 exchange outside US

Dear 1031x: Can I sell my property located in the USA, using a 1031  exchange - to buy a property outside the USA? An International Property in Denmark, for example. (same price).

 

Dear E:  The code specifically states that real property located outside the US is not like kind to property within the US.  This is easy to understand as once the gain is deferred into a foreign property the IRS loses track of it altogether.  We have done some 1031x transactions for US taxpayers selling in one foreign country and buying is another.  Finally, you could keep your US property, take cash in the form of a mortgage and use that cash to buy outside the US.  

 

Steve Hickox
Attorney / President

1031 exchange two properties into one

In a 1031 exchange, when combining the sale proceeds from 2  properties to purchase just one property, how many replacement properties  may you identify?

 

Dear M: Thank you for contacting us.  In your example you are really treating this as one exchange (usually only three ID properties).   You could treat it as two exchanges, but because you only want to buy a single property the property that you purchase would have to identified in both exchanges anyway.  Sincerely

Steve Hickox
Attorney / President

 

1031 exchange cashing out

Hello,   Thanks for taking my question. In 2003 I sold a property under 1031. The  original sale price was $125000. and we sold the property for $175000. We  then used the 1031 and purchased a rental property for $210000 thus  avoiding capital gains. We are now going to sell the new property in early  2006 for $230000. We are not going to purchase a new property but just  take the money from the purchase and pay off bills and invest the rest.  Please tell me what amount of capital gains I will be taxed on and at what  amount.     Thanks,            D

 

Dear D:  In your example you would be taxed on at least $105K at 15% long term capital gains.  That does not take into consideration recapture of depreciation or state income tax.  I believe that your tax liability will be larger than you think.   Are you sure you want to do this?  If you just need cash why don't you refinance the property and take cash out tax free?  Contact me for more strategies.  Sincerely,  

Steve Hickox
Attorney / President

1031 exchange tax estimate

Considering 1031. Property in CA. Paid 129,000; depreciation  35,000; mortgage payoff 95,000 taken from selling price; sale commission  25,000; Selling 485,000. Buying Property in TN 350,000; no mortgage. 1031  ok? Fed tax amount owed?

Dear R:  Thank you for contacting us.  The tax in your example is estimated as follows: $485K- $25K= $460 net sale price.  $460K-$350K= $110K trade down in value. Of that the first $35K will be recaptured depreciation taxed at 25% ($8,750) and the remaining  $75K will be long term cap. gain taxed at 15% ($11,250). Finally the entire $110K will also be taxed at 9.3% California State tax ($10,230).  TOTAL ESTIMATED TAX YOUR EXAMPLE= $30,230.    The exchange still provides significant tax savings to you.  If you want to defer all taxes you will have to buy a second property of at least $110K.  I hope we can help you with your 1031x.  Sincerely,

Steve Hickox
Attorney / President

1031 exchange and principal residence

Dear 1031x: Can an income property be exchanged for (or into) a primary  residence ?

Dear S:  Thank you for contacting us.  For tax deferral under 1031 both old and new properties must be held for investment, AT THE TIME OF THE EXCHANGE.  If after you purchase the replacement property you have an unforeseen change in circumstances then you can change your investment intent into a principal residence use.  I hope that we can help with you 1031x needs. Sincerely,

Steve Hickox
Attorney / President

1031 exchange related party

Could you please tell me about code section(f)and its effect. Thanks.
> Y

Dear Y: IRC section 1031(f) deals with 1031x transactions between related parties. Unfortunately all of the tax law regarding related party 1031 transactions is NOT contained within the statute. In order to really advise you I need more details. Please tell me more. Sincerely,

Steve Hickox
Attorney / President

1031 exchange moving states

I have a rental in South Carolina that used to be a primary residence before I moved to Texas. It has appreciated in valued considerably and I am curious of how the 1031 exchange works. If I sell it and buy like kind property in Texas, will I have to pay capital gains to South Carolina @ 15%? If so, what if I buy like kind property in South Carolina? Is like kind property residential rental property like I have right now or are there other investments types that would qualify?

Dear R: Thank you for contacting us. Here are the answers to your questions: 1) If you have lived in the SC property for two out of the last five years than you can sell it and claim tax exemption under IRC section 121. 2) Assuming that you moved to Texas more than three years ago then a 1031 will be a good idea. If you do not do a 1031x then you would pay state and federal income tax. 3) All real estate is "like kind" to all other real estate as long as it is held for investment. You can sell in SC and buy anywhere in the US that you want. We are looking forward to working with you. Sincerely

Steve Hickox
Attorney / President

1031 exchange time length deferral

HOW LONG CAN THE TAXES BE DEFERRED WHEN THEY ARE EVENTUALLY PAID WHAT IS THE RATE.

Dear P: In a 1031x tax are deferred until the replacement property is sold without a 1031x. That can be forever. If you do sell the replacement property without a 1031x then the gain would be taxed at the tax rate imposed on that future date. I hope we can help you with your 1031x needs. Sincerely,

Steve Hickox
Attorney / President

1031 exchange holding period

How long must I own the property? I have owned less than a year and the property has almost doubled. Can I move on to another property?

Dear D: There is no required holding period prior to a 1031x. As long as your intention at purchase was to hold for investment and not for immediate resale then the marketplace can dictate your decisions. I hope you will let us help with your exchange. Sincerely,

Steve Hickox
Attorney / President

1031 exchange related party

Comments: can my llc buy my mortgaged property under sole prop.as a 1031 exchange.

Dear Joe: If I understand, you want an LLC that you own at least 50% of to buy as replacement property in a 1031x another property that you own in your individual name. This transaction, in general, would be prohibited by the IRS. In very limited circumstances it would be allowed. Those circumstances would be: 1) If you, in turn, did another 1031x as you sold to your LLC, or 2) If you were reporting a large gain on the sale of your property to your LLC. If neither of these circumstances exist for you then the transaction would not qualify for tax deferral. Sincerely, Steve Hickox
Attorney / President

1031x.com has grown to provide many services to our clients as Castle United!

Capital Gains and Depreciation Tax

Why does your capital gains calculator state a 15% fed tax rate, but
calculate at 12%? Am I missing something?
Carrie

Hi Carrie,
You asked about why the tax calculator on the 1031x.com website seemed to show a tax of 12% when it actually states that the tax rate is 15%. Good question!
The IRS takes your Capital Gain and taxes the recaptured depreciation portion at 25% and then taxes the REMAINDER at 15%. For example, if your gain were $90,000 and your depreciation were $20,000, your tax would be:
$20,000 * 25% = $5,000 plus
($90,000 - $20,000) * 15% = $10,500 plus
$90,000 * State Tax

I hope this helps. Thanks for the question (I am thinking of adding a note of explanation to the calculator!)
Sincerely,
Katie Zulanas
Director of Operations
1031x.com
1-888-899-1031

Primary Residence is IRC Code 121

We are often asked if IRC Section 1031 applies when you sell your Primary Residence.  Actually, you are usually in better shape, tax wise that is, if you can use Section 121.   In general, this says that if you sell your primary residence after residing there for 2 years or more, the first $250,000 of gain is excluded if you are single, or the first $500,000 of gain is excluded if you are married.  We actually know couples who sell/buy a new house every two years to enjoy the tax benefits of Section 121!

 

Katie Zulanas