1031 Confusion-Is My CPA Correct Here?
I would like to know if what my CPA told me sounds correct to you guys. Here is the scenario:
I bought a lot - $77,000 (cash from my personal home equity line)
I built a house - $116,000 (construction loan from bank)
Total - $193,000
I’m selling a year later -$276,000
I was under the impression that when I sell, I can take the $116,000 and payoff the loan. Then take $77,000 and repay my home equity line. Then, the remainder $83,000 (less costs of sale) should be my profit to use for a 1031 exchange.
My CPA told me today, the $77,000 could not come back to me without being taxed. He said if I wanted to avoid being taxed on it; I must 1031 it along with the profit.
Does that make sense to any of you guys? Shouldn’t I get out what I put in…..Or is my CPA correct?
Thanks for the help. Brian
Your CPA is correct. You cannot apply 1031 exchange funds to your personal debts without a tax consequence.
In this case then, I should not have purchased the lot with my money, maybe I should have financed it as a package with the structure.....
Now that I find myself in this position, can you see a strategy for me to get that 77k back out?
Complete your exchange. Then, do a cash out refinance on the replacement property.
My PM said "Thanks for responding to my post, Brian"
Same to you Jim, thanks.
So if you 1031 160k, will you not eventually be taxed on the 160k basis?
If not, then I could 1031 75k into a house. Refinance or cash out refi at 100% LTV for 125k. Then when I sell there are no proceeds. Seems like the government is going to want their tax on the original 75k.
Please explain.
1031s defer capital gains taxes on "like kind" exchanges of investment assets. Unless you continue to do 1031s on the exchanged asset you will owe capital gains taxes as well as recaptured tax on depreciation. I have seen some great posts on TCI explaining 1031s and there are pages and pages of rules and regs which should be interpreted for you by your professional tax advisor.
I understand the basics of 1031. But I do not understand how you can do a cash out refi and not owe tax on that money.
Quote:So if you 1031 160k, will you not eventually be taxed on the 160k basis?
If not, then I could 1031 75k into a house. Refinance or cash out refi at 100% LTV for 125k. Then when I sell there are no proceeds. Seems like the government is going to want their tax on the original 75k.
Please explain.Brenda,
You are correct. In the situation you outlined, there are no proceeds when you sell, BUT there is still a profit.
Your net sale price minus the adjusted basis is your taxable profit, regardless of the balance of any loan on the property. Your profit is used to determine your tax liability.
if there are no proceeds from the sale, then you would have to come out of pocket to pay the income taxes.
Borrowed money that must be repaid is not taxable income. It is a loan that must be repaid with your after-tax dollars.
Tip of the hat to NewKidinTown2-3..... The quality of your posts are a real addition to the TCI forums.
Pay attention, people![ Edited by jimandlacy on Date 09/10/2005 ]