Capital Gains Trouble
I have spoken to the owner of a rental property who could be convinced to sell, but is concerned about the CG taxes on the property. Other than a lease option to postpone the sale, is there any way to handle or offset the taxes?
Of course a 1031 exchange would work, but they probably want out of the real estate investing business. I would have them talk to a financial planner about exchanging into a REIT. That way they have no management headaches.
The owner could potentially sell the proprety to you via contract for deed and could use the installment method of reporting. Investors labeled as "real estate professionals" cannot use this method of reporting.
Quote:
On 2004-05-06 20:58, myfrogger wrote:
The owner could potentially sell the proprety to you via contract for deed and could use the installment method of reporting. Investors labeled as "real estate professionals" cannot use this method of reporting.
Could you elaborate on the "installment method"?
Quote:Of course a 1031 exchange would work, but they probably want out of the real estate investing business. I would have them talk to a financial planner about exchanging into a REIT. That way they have no management headaches.johnbriscoe,
With REITs, you are a shareholder in a company that maintains control of the assets. REIT stock does not qualify as a replacement property under Section 1031 of the tax code.
You can structure the acquisition using an Up REIT structure. It takes a little more time and expense, but it would ultimately get you into a REIT. I'm not an expert in this area, but can get you information if you are interested.
If the seller does not want to get out of investment real estate, but is concerned about finding the right replacement property, they could take advantage of the reverse 1031 exchange structure by locating and acquiring their replacement property first and then selling their existing property (or they could do a simultaneous exchange if you work with them).
so how old is this guy, whats his motivation?
What's the property like?
Quote:You can structure the acquisition using an Up REIT structure. It takes a little more time and expense, but it would ultimately get you into a REIT. I'm not an expert in this area, but can get you information if you are interested.Here is an exerpt from an article by Ray Smith published on May 5, 2004 in the Wall Street Journal's Real Estate Journal
Can You Swap Property For a REIT Stock?
You can't swap property for a REIT stock using a 1031 exchange. In 1031, or like-kind, exchanges, real-estate owners defer capital-gains taxes on the sale of property by turning around and purchasing a property of equal or greater value, according to rules established by the Internal Revenue Service. In most cases, a third party prepares the exchange agreement and handles the money. The property the seller wants to buy has to be identified within 45 calendar days of the sale and purchased within 180 days. REIT stocks aren't eligible replacement or "like-kind" property in a 1031 exchange.
However, Louis S. Weller, a principal at Deloitte & Touche LLP's national real-estate tax-services group in San Francisco, notes that some REITs use investment techniques that can help delay taxes just as a 1031 exchange would. These REITs offer tax-deferment benefits to investors who contribute property to an "operating partnership" controlled by the REIT. In return, investors receive what are known as "OP units." OP units share some of the characteristics of REIT shares, including paying dividends.
This "exchange," done under the right circumstances, doesn't trigger a capital-gains tax event. At some point you could convert the units into REIT shares, but if you decide to go that route, you'd have to pay taxes as that conversion would be considered a taxable event.
The installment method is a land contract whereas the seller, probably having completely depreciated the property, pays cap gains as it is received, as compared to paying it all at once, as would be due on a cash sale. One other way that a lot of people do, although not hoyle, is to write it up for less and give the seller an unreported large sum of cash. Unreported/untaxed/illegal. I don't condone it, but folks, capital gains are a fact of life.
Good Luck,
Shawn(OH)
Quote:
On 2004-05-15 19:33, commercialking wrote:
so how old is this guy, whats his motivation?
What's the property like?
Originally, I found the house while cruising the neighborhood and tracked down the owner. I believe him to be middle-aged (spoke by phone only).
After speaking with the owner again, I discovered that he isn't very motivated and has unrealistic expectations. The comps place his property at about $308K in top condition. He wants $400K even though the property needs work.
The home is empty (he lives in another city), the yard is overgrown, the neighbors are annoyed and the owner seems okay with it. If he weren't so firm on the price, I would have offered a L/O. He wouldn't even tell me what was owed on the property.
I left my number with him, but unless someone has another angle to consider, this is a dead end for now.
Clarence
Can you use a 1031 for a TIC propery? (Tenant in Common)
Yes.