Capital Gains Rollover Prior To 1997...
Does anyone know whether or not the gain from the sale of a home prior to 1997 that was rolled over to another home is taxable if sold today?
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Example
Original home sold in 1990 for a gain of $50k
New home bought for $150k with $50k down with rollover money and loan amount of $100k.
Now selling new home for $300k
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I know that gain up to $500k is tax free for married couples ($150k), but unsure if the original $50k they put down will be taxed.
Thanks,
TAT
Short answer is NO. Your prior rollover gain is included in the basis of your replacement primary residence and is no longer taxable under the pre-1997 tax code.
If you want the long answer .....
IRC section 1034 required mandatory deferral of any profit on the sale of a primary residence provided all the gain is reinvested intoa replacement principal residence within two years before or after the sale.
The Taxpayer Relief Act of 1997 repealed the IRC section 1034 deferral provisions and enacted new rules that give a limited exclusion once every two years. Now any gain remaining after the capital gains exclusion, is taxed regardless of the acquisition of a replacement residence.
tat,
It has been a couple of days since I responded to your post. In reviewing what I said, I realize that I did not answer your question very clearly.
Let me try again.
When you bought your replacment primary home prior to 1997, you decreased your cost basis by the amount of the rollover gain in accordance with the Section 1034 rules in effect at the time.
When you sell your property today, Section 1034 no longer applies and has been replaced by the new Section 121 rules.
Under Section 121, up to $250K of sale profit per taxpayer can be excluded from capital gains taxes whether or not you purchase a replacement primary residence.
For this calculation you would use the adjusted cost basis you carried forward from the pre-1997 purchase. So, the amount of gain will include the pre-1997 rollover gain which may not be taxed if your gain is less than the capital gains exclusion.
I hope this answer is clearer.
A real estate professional and a dealer to real estate are not the same thing.
If you are a dealer to real estate, then YES, all your profit on the deal is taxable in full in th year of the sale.
If you are a real estate professional, but not a dealer, you can still do installment sale tax treatments to minimize the annual tax bite, or 1031 exchanges to defer capital gains indefinitely.
The example you cited sounds to me like an investment property sale and should get the installment sale tax treatment.
Your lease option activity might be a dealer activity, but we need more details before we can be definite.
Time to get a second or third opinion before this accountant does your tax returns.
As NewKid posted, I think you are describing how a dealer is taxed. I believe this is the case for any sales (car sales, etc.) as a dealer. If you are not a dealer, the installment sale is handled as distributed as you would expect.
The bottom line is that if you ever have the urge to do "dealer" activity, do it in a separate entity (eg. C or S corp, LP, LLC...) and keep good records. The entity will be the dealership... not you.
Disclaimer: I am not an expert in this by any means. Consult your accounting expert. (I do see the guidance given to our LLC members regarding these issues, though, so there is a basis to this post.)
I think you need a new accountant. A CFD is the perfect example of an installment sale. You cannot be taxed on money you have not received yet. I sold a property in 2006 CFD and reported this as an installment sale on my taxes. I am not a tax professional, but you should DEFINATELY get a second or third opinion from a tax pro.
Why do you say Lease Options are frowned upon in MN? I have several students making their fortunes there via Lease Options.
[addsig]
Question From Rich Young:
Bill, in one of your answers you bring up the possibility of one being declared to be in an IRS "dealer" status.
Can you elaborate as to what would be so bad about that? And why would being incorporated provide relief from the bad effects?
Answer By William Bronchick:
If you buy, rent and sell real estate, you are an investor. You report on schedule "E" of you federal income tax return. You depreciate, exchange, enjoy capital gains treatment and installment sales treatment.
If you buy with the intention of immediately reselling, the IRS considers you a dealer. There is no magic formula for which this label attaches, but general the question is one of intent.
If you are tagged as a dealer, all of your dealer properties are considered "inventory." You are considered a schedule "C" business, which subjects all of your dealer profits to self employment tax. All of your installment sales are subject to tax on the profits, even if you collect your equity over 20 years. You cannot exchange dealer property. You cannot depreciate it either. The IRS likes to lump ALL of your properties together, even the rentals, so that ALL OF YOUR PREVIOUS DEPRECIATION WILL BE RECAPTURED! OUCH!!!
If you do your dealer properties in a corporation, it separates your dealer activity from your rentals. If your corporation is tagged as a dealer, then only its activity is subject to the dealer rules. There is no self-employment tax, unless you take a salary. The installment sales are still subject to taxation on the full amount of your profit, but there are some creative ways to get around it.
Disclaimer: The foregoing is not intended to be given as legal, financial or tax advice, but intended for instructional use only. If you require legal, financial or tax advice you should seek the assistance of a qualified professional.
[addsig]
Back to your original question of tax deferral (Not Avoidance). You can create a separate entity (Entity B) that will purchase the note at the going rate (say 75 cents on the dollar), and then you will only pay taxes immediately on the profit up to the 75% purchase price. Then, if the buyer continues to make payments on time and/or once the balloon comes due, then Entity B will pay taxes on that profit from 75% on up.
I know that alot of Buy Here Pay Here car lots do this to defer taxes on the huge paper profits.
Back to your original question of tax deferral (Not Avoidance). You can create a separate entity (Entity B) that will purchase the note at the going rate (say 75 cents on the dollar), and then you will only pay taxes immediately on the profit up to the 75% purchase price. Then, if the buyer continues to make payments on time and/or once the balloon comes due, then Entity B will pay taxes on that profit from 75% on up.
I know that alot of Buy Here Pay Here car lots do this to defer taxes on the huge paper profits.
The IRS has rules that cover self-dealing transactions such as this one which negate any potential tax savings.
NewKid,
Where can I read about these rules?
It seems that if the transactions were between two separate legal entities, and that they were at the market rate, then there should be no problem.
CJ - Good resource for non "direct" real estate activities. From http://app1.sba.gov/training/sbafp/ Slide 16:
"...assistance is not available to support...
2. Financing real estate for investment..."
I am still thinking about launching a asset preservation/field service company... and I would probably go through SBA for financing.
Sorry, let me clear that up. I was going to sell it to her instead of refinancing. That way we get the new loan at a better rate (effectively refinancing the debt). It would be a valid sale for value, so from a lending standpoint, it is arms-length.
The larger question is: Will it appraise at or above your mortgage balance?
In our area, appraised values are 40%+ below peak values in mid-2006.
And the Mortgage Companies are lending at 80% loan to appraised value. Is your deal doable under that scenario?
[addsig]
Go ahead, buy the house. Sounds like a good plan. I just did a similar thing myself, gave a few thousand to ex-spouse for the first time homeowner credit. It actually closed last week.
If you are unsure, you can still get married, just file 2009 separately....to be absolutely sure. Worst that can happen if u joint file would be a $4000 credit.
Obviously, you know you cant be on the title or mortgage, but doesnt sound like u would anyway.
8k is a lot of cash, it certainly made a difference in my transaction and offer.