Avoiding Capital Gains
I'm submitting an offer (likley will be accepted) on a home that is an inherited property (no mortgage) I have structured an offer for 88k that would be seller financed 0 down. Upon the sale the owner will not be recieving any cash but will be subject to capital gains? This is the only weakness of this deal, if I could lease the property from him for a period then purchase via L/O could he set up a 1031 exchange and find a like-kind rental and defer all of the capital gains tax into the new rental. If he recieved any proceeds from the sale the 1031 would fail, in this case 0 down and interest only payments - he would not recieve any proceeds at this time. If this is possible how long of a lease term would I need before purchasing to make it a legal 1031 exchange. If not possible how will he pay capital gains without recieving any cash at closing.
If the seller recently inherited the property, AND if your offer is at or below the appraised value of the property when it was inherited,
THEN, there is no profit on the sale of the property to be taxedJust go ahead and purchase the property outright. There is no need for an elaborate deal structure.
Thank you - I knew I was making it too hard.
Tell me if I understand this correctly - on an inherited property the tax basis IS the appraised value at the time of conveyence and if the property were to sell above the appraised value then the difference would be subject to CG tax.
Mneoguy,
You essentially have it right, but for one thing. Regardless of the date of conveyance (probate can sometimes take awhile) the cost basis of the inherited property is the appraised value on the date the deceased owner passed on.
If sold immediately after conveyance with no intent to hold for income production or future appreciation, any profit on the sale would be taxed at ordinary income tax rates.
After holding the property more than one year as an investment, any profit from the sale qualifies for the long term capital gains tax rate.
In the event there is a capital gain, the seller carry back would be taxed under Section 453 (Installment Sale Rules). The tax would be recognized each year to the extent principal payments are made.
If you lease the property with an option to buy, the owner could structure a 1031 exchange transaction at the time of sale/closing.
[addsig]
If property was inheirited, holding period is automatically long-term. So, should qualify as capital gain.