Have I Created A Tax Nightmare? Experience?
Ok, I sold a rental in 1-06. Details:
Basis 130K
only owed 48K on property (So,
Sold 259K-29K costs
Did a 1031 exchange... BUT
took 50K at closing, rolled 80K into exchanged purchase, then took 30K leftover boot.
So, logically, I want to say that profit was 100K and I rolled 80K of that into exchanged property. Yes?
Sounds like you took $80K boot. One requirement for a totally tax deferred exchange is that you reinvest all of the net proceeds from the relinquished property sale into the replacement property acquisition. All money withdrawn from the exchange proceeds and not reinvested into the replacement property acquisition is boot. Boot is taxable up to the amount of your taxable profit.
Profit is not the difference between what you owe and your sale price. Profit is the difference between your adjusted cost basis and your sale price.
If you took that much money out of your exchange funds as boot, I suspect you will end up paying nearly all the capital gains taxes and depreciation recapture that would be due anyway. Sort of nullifies the exchange.
Any recommended reading on how to plan better to not allow the untaxable dollars to not be caught up in an exchange? Should I have refinanced first so that this cash did not get seen as boot?
In this case, it appears to me that there was 80K sitting idle (130K basis - 50K financed funds) not counting the depreciation recapture that I would be accountable for.
Worksheets, books, readings appreciated. I am working with the IRS site, but you know that is lengthy research.
Thanks in advance for Any Good Education Tools.
Your case is a GREAT example of why it is a good idea to have a tax professional for advice...they do save you money.
There are certainly books on 1031 exchanges, but it can be complicated and professional advice is usually worth it for 1031 exchanges.
Yes, finn, you are right. You make it sound very easy to find professionals that have all the answers. Nice try.
Bill, Can I just void out the 1031 and take my lumps on this one? I ask because the property that I bought is going under contract and I would rather just let it have its own basis. i have not yet done my 2006 taxes, so reporting now would be easy. Thx.
Quote:
On 2007-03-21 17:52, ceinvests wrote:
Bill, Can I just void out the 1031 and take my lumps on this one? I ask because the property that I bought is going under contract and I would rather just let it have its own basis. i have not yet done my 2006 taxes, so reporting now would be easy. Thx.
ceinvests,
You completed the exchange, you can not just "opt out". Since your desire is to maximize the cost basis for your replacement propertym the good news is that the $80K boot you took is included in the cost basis on the replacement property.