Paying Capitol Gains
my husband and I purchased a home. We lived in it for 15 months then decided to sell. We made a profit of $64,000. and we are now in the process of building another home. Do we have to pay capitol gains? Is there a way to avoid paying?
You sdhould have done a "Like Kind Exchange" 1033. Particularly given you are talking about your resdidence.
You are in a better positin that mot investors from a Tax perspective.
Assuming you use the correct forms. Talk to your or an Accountant and be sure to sdearch in "Tax Forum" on TCI ((thi website))
Good Deducting
Joel
Joel, was 1033 a typo for 1031 or is there another like kind exchange that is used for non investment property. I just completed a 1031 for investment to investment property but I have a 2nd home that I would like to sell and avoid capital gaines on. I was told that a like kind exchange can only be done with investment properties.
Thanks[ Edited by Francine125 on Date 03/13/2005 ]
Tracyew,
There is a lot of incorrect information in the previous responses. You would be well served to get your own tax advice from a professional you trust.
Section 1033 only applies to property taken by eminent domain. Unless the government has threatened to seize your property through condemnation, this does not appear to fit your situation. Section 1031 only applies to business or investment property; your personal residence does not qualify.
From the information you have provided, it would appear that the sale of your primary residence after only 15 months of ownership and occupancy qualifies for long term capital gains tax treatment. Unless there are other details concerning your reason for selling, other than to take a profit, there is no tax deferral or exclusion available to you in your situation. The maximum long term capital gains tax rate is 15% this year.
NewKid is right (as always)
Contact you tax professional
The tax pub is IRS Pub 523. If you meet certain criteria, you may be able to get out of some of the tax but not all of it.
Marc
1031 is only for investment property. 2 years is the minimum holding time to qualify for exclusion of gain.
just to clarify, 2 years is minimum to qualify for the personal residence exclusion of capital gains of $250k per person ($500k married couple) .
Thanks everyone for the info, I will contact a tax professional. I think that would be the better way to go about this..
Exactly. In the first and last year, you take a partial amount based on purchase/sale date. For example, a Sept 1 purchase would get 166.67 x 4/12 (or number of days if you want to really get technical).
Thank you so much, Blueford! This has been driving me crazy (see my posts in the Birddog/Beginner forum) and I truly appreciate you clearing this up.
No more posts on amortization- I promise! :o)
Tracy
I would seek a good/qualified real estate tax accountant if I were you...
Good Luck!
[addsig]
From the horses mouth....
http://www.irs.gov/taxtopics/tc504.html
This should answer any/all of your questions...
Tracy,
I believe the response you received from the IRS is incorrect on the question of mortgage points. Mortgage points that are reported as interest are deductible over the life of the loan as mortgage interest. IRS Pub 527 gives the taxpayer four different options for claiming de minimus amounts, while specifying the procedure for non de minimum amounts.
All the other costs of obtaining financing are capitalized (added to the basis of the property) and recovered through depreciation.
My reference here is Pub 527.
Tracy,
Yes, the points did discount the loan rate but also reduced actual amount loaned. You "borrowed" $500K and then paid $5K to buy down the interest rate by one half point.
The lender brought $500K to the table and took back $5K, so, the lender is "out of pocket" is only $495K. To compensate the lender for the reduced interest rate, you agree to repay the lender $500K and have your loan amortize on that higher amount.
[ Edited by NewKidinTown2 on Date 02/25/2005 ]
Tracy,
On line 42, Form 4562, the code section that applies to your amortized refiancing costs is 163.
Carry the amount from line 42(f) to Schedule E, line 18 (Other Expenses) and enter "Amortization" for the expense description.
Tracy,
After a little more reading on this topic, I was wrong in my earlier post when i said that certain "mortgage" expenses for your refinance are adjustments to basis and recovered through depreciation.
It turns out that when you refinance your rantal property, expenses such as mortgage commissions, abstract fees, recording fees, title abstract and title insurance, credit report, appraisal, and legal fees are all capital expenses that are also amortized (not depreciated) over the life of the mortgage. Include these costs, as well, when you are calculating your amortization expense.
The way I read it, the charges are amortized even when the rental property is initially purchased.
Hi again,
By charges, do you mean title insurance, transfer taxes, etc. , or points? It seems like they would be handled differently according to my understanding (and I use that term loosely!) of Pub. 527.
Many thanks,
Tracy
I think of it this way, anything that is connected with the purchase of the building (inspection, title insurance, transfer taxes) would be added to the basis of the building and depreciated. Anything associated with the financing (points & other fees charged by the lender) are capitalized and amortized over the life of the loan. Anything on the settlement statement related to everyday operations (utilities, hazard insurance, interest) is deducted in the current year (but make sure it’s something that’s actually paid and not just going into escrow).
I would say the rules apply the same whether a purchase or refi. Technically items like title insurance replace the old title insurance (from original purchase) and should be depreciated over the life of the building. However, it’s more practical just to combine all refi costs and amortize with the new loan.
Are there not tax advisors/accountants/gurus out there who can help me, Please???
I do not have any professional references for you in your area, but you can search for attorneys on http://www.martindale.com and sort by category such as tax attorney, etc.
[addsig]
I like to use test questions that are a bit off the wall but I have used other resources to confirm the answer.
One I used was can I hold a property < 12 mos and do a 1031.
SE tax ramifications of LLC
being a dealer and carrying an inventory
UBIT (?) the unrelated buisness tax that people mention now and again.
I forget the others.
I hope somebody answers you soon because I would like to know the answer to this too.
InvestoNC,
today is your lucky day. I can answer your question. You did not indicate which company you have your IRA with and there is only one well known 3rd party custodian that I know of that does this well. A lot of the well known r.e. gurus are encouraging their students to do this. The custodian is Equities Trust Company. Check their website for some eye opening information.
What is recommended is that you open a ROTH IRA. The account is opened, you place your allowed contribution for the year (if you do it before April 15, you can can put in the 2004 allowed contribution and you can put another contribution in for 2005.
From the point you that "fund" your IRA until whenever, you are allowed to use your IRA to purchase property, do rehabs, etc (there are other investments that you are permitted to do in your IRA - check the website for further info).
What you have to remember is that you and your IRA are two separate entities. Therefore, all IRA purchases have to be in the name of the IRA (the custodian tells you how it has to be worded). Now if you have used a ROTH IRA for your investments, any appreciated investments are returned to the IRA TAX FREE!!. In other words, any money you make on the investment, is returned to the IRA tax free. There is not limit to how much appreciated capital can be returned to your IRA. The only limitation is how you can contribute annually. Return on investment is not considered a contribution so there is NO LIMIT ON HOW MUCH YOUR IRA CAN GENERATE.
More importantly, after age 59 1/2 OR after the account has been in force for 5 years or more, you can withdraw the money in the IRA tax free...FABULOUS!!!!
Here is another benefit. You can borrow the IRA money of family, friends and associates to purchase property. The technique is called Private Lending. Of course all custodians do not do this. Some tell you that your self directed IRA can invest in the list of items they make available to you ....BORING.
The custodian that I am referring to charges a $50 application fee and an annual processing fee (no matter how many deals you do thru your IRA it is just one flat fee) and they require that you maintain a minimum of $200 in your account. As a matter of fact they have a tape and book course that gives all of the details or you can read the info on the website and call customer service to ask additional questions. Their service is great.
You have to check this out because it is really fabulous. Learn how to do this because the technique allows you to build generational wealth. I have given you the basics. Do your homework and write me if you want to discuss this some more. BTW if you are not doing business with this custodian, you need to transfer your money to them and ROCK.
I do not work for them - just passing along some real good information. BTW. I intend to do some investing in NC this year - my family lives in Wilson. Would you mind telling me what area you are farming and what areas would you recommend? Good luck.
So if I understand it right could you use your IRA funds as a private loan to a company you own which you then use to buy property? If this is possible can you write the loan as a joint venture and take a unusually large % of the profits as a way to increase your IRA funds alot quicker. Otherwise it would take years to build it up using the max yearly deposits.
TBARBER
Thanks for the help. I am glad the company I happen to have my Self direct IRA is is Equity Trust.
I will look on their website for more detials. My other question is that if I use both my regular name how much of the gains can I then put into the IRA.
example property 50K
10K
40K mortgage loan
Now property sold for 100K
Can I then put 50K of profits into the IRA or am I only allowed to put in by percentage per investement as in this example it would it 20% so I would only be allowed to add another 10K of the 50K profit to my IRA
Thanks for your help
Your IRA moneys leveraged the initial purchase, therefore all gains would end up back in your IRA before taxes. The downside is the IRA distributions come out as regular income taxes and not capital gains if you met the time held requirements. If you have sufficient funds in your ROTH, this becomes a no brainer. An IRA to ROTH conversion, if you qualify, makes a world of difference when you finally make distributions after age 59 1/2. And with leverage, you can really supercharge your IRA/Roth IRA returns. Make certain that you are able to leverage your RE purchases when seeking out your new self directed IRA custodian. Best of luck in your search.
TBarber,
with this particular custodian, they have a list of "prohitive actions" (check the website for a full description). What you are suggesting does not seem like it would be allowed.
Why would you need to do that if you are using your IRA to purchase the property? Let me clarify one thing. In a real estate purchase transaction, your ROTH IRA is the owner. Therefore, when you flip it or take in rents from it or accept option money and subsequent rental payments, ALL of that money goes back to the ROTH IRA. You do not have a choice, the custodian tells you how that money/profit/stream of payments MUST flow back to the IRA. ALL of this additional profit flows back to your ROTH IRA - the entity that owns the property.
This returned profit EXPLODES your IRA value and it is taken in to the ROTH IRA tax free!!!.
If you still do not understand the basics of this methodology please take the time to read the information on the website. It is so worth it!!!!! Do not sleep on this one.
NEWSFLASH!!! Your ROTH IRA account can only be setup if your Modified Adjusted Income is under $160,000. If you are over that, you can open a Traditional, SEP or Simple IRA that can do the same thing but the profit returned to your IRA is on a tax deferred basis - not a tax free basis.
So....basically you can buy a property, flip it and make 50K, and you are not taxed at all on the 50K???? The Roth was created for "after tax" monies. If this is truly a hole in the IRS, I suspect that it will be closed soon....am I right??
I am 28 years old, married filing jointly and we make under 100K. How much can I put into a ROTH? Can I still make a 2004 contribution and also make a 2005 contribution? If so, when can I withdraw the principal and in what circumstances? When can I withdraw the gains?
I tried to ask my CFP these questions, but he is out sick this week and not answering emails.
Quote:
How much can I put into a ROTH? Can I still make a 2004 contribution and also make a 2005 contribution? .
You have until April15th, 2005 to contribute up to 3K as a 2004 contribution into your Roth or individual IRA. 2005 contribution limit goes up to 4K.
Tracy:
YES...exclusions cover Your Personal residence.
BTW - HUD terms a SFR as a 1-5 Units
Anything more is considered a Commercial property...
Check with your tax Pro for the final word on the matter.
Hope this Helped And Happy Investing!!!
Derrick Ali :-D
NewKid:
Are you inferring these units are Condos???
The FHA Multi-Family Program does NOT lend on 2-4 units and according to HUD 2-5 Units Properties are RESIDENTIAL.
Do you have a link or IRC ruling on handling Capital gains in relations to 2-5 Unit Sale-Transactions or is this just your opine? Thanks for any clarity you can offer.
Again...anyone out there had any experiences (good or bad) relative to IRC and captial gains exlcusions on your PRIMARY SFR?
NewKid,
I understand the tax completely. BUT....is there a way to buy a multi-unit property and make it a single unit property? I have seen properties on the MLS that advertise that they could be converted back to a SFH.
If a person was to buy an old house that was turned into a 4-plex and made it a SFH, it seems like you could exempt the whole property as a primary residence.
Then, when you sell it, you would have to sell it as a SFH "that could be converted into a 4-plex"
???? What do ya think ?????
You can take a multi-family property and, through renovation, convert it to a single family property. This SFR after two years of ownership and use as your primary residence will qualify for the capital gains exclusion under Section 121.
Zoning is one factor on this issue along with:
You must actually live there
Get mail there
Be able to prove in an audit that this is your primary residence
Normally you will need to live there for 2 year.
[addsig]
Hi Devlon,
Just to be clear: I would not be renting out any units. The plan would be to buy it, move in, remodel, and sell after 2 (or more) years. The improvements I make would be added to the basis, and the repairs would not be expensed (as this would be a personal residence).
Thanks for the help,
Tracy