Capital Gains Question
Hi, sold a property in Feb 2005 which I took a tax deed on in IL in Nov 2004. I only held it for 3 months after I got the deed, but obviously it took years from the time that I bought the lien(2001). Anybody know if I have a long term capital gain, or ordinary income?
Anybody have an accountant who specializes in this?
If you have a profit, it would appear that ordinary income tax rates apply.
Yes, I know that if the purchase date is considered to be 2004, then ordinary income. But the deed states that the property was sold for delinquent taxes in 2001. But there was a redemption period of 3 years, which obviously expired. The deed was then issued after the expired redemption period, and recorded in 2004, even if it mentions that the property was bought in 2001. So I took possession in 2004, but had technical ownership since 2001, and also had put out the money in 2001. So long term or short term? Any actual experts out there?
Sorry I am not an expert but I will share my two cents. If I am not mistaken, capital gains have nothing to do with when you took possession or when a tax deed was conveyed to you. It has to do with when you initially invested in an asset, be it Stock, a TLC, or Real Estate. Example: I can buy a tax lien cert. with a three year redemption period, if after two and a half years it is redeemed, long term capital gains would apply to the interest I receive. In your case if I input all your information in my Quickbooks program, at the time of the sale I would make a journal entry and I would have to put the date in which you initially invested in the lien (2001) as “purchase date” and the date of the sale of the property as 2005. So the gains or loss would be long term. I am not an accountant so please check with competent professionals before acting on any information given in forums.
I think if you read these forums a bit you will consider NewKid an "actual expert" on tax matters.
Chris
When a tax lien is redeemed the funds that you recieve from the County are both return of capital ( the return of your investment) and interest. The interest is always taxed as regular income at your tax rate.
When you receive ownership from foreclosurer of a tax lien you receive no interest. The initial investment is then your basis for the cost of the the property. If you make any improvements or incur any expenses as a result of ownership,or incur costs to accure then add to this your basis.
When you sell this property, the taxes are treated the same way as if this were any other owned property. If you have never lived in it, the tax is treated as capital gain. The date to consider is the date the deed was issued. That is the date you took control of the property (ownership), until that date you were a lien holder with a recorded interest in the property.