Q-1:

Subject: Exchange Question

 

State:  CT

 

My parents own our business building.  It is a corporation I believe.

 

Are corporations not allowed to do the exchange thing.

 

If they sell the original big building and buy a smaller building can the save tax money with the 1031 exchange?

 

Lets say they sell the building for 1 million.

 

Buy a smaller building for 300,000

 

Can they save on taxes for the 300,000

 

I assume they are on the hook for the 700,000 difference.

A-1:

Corporations can do 1031 exchanges just as individuals can. 

The rule to avoid all of the tax is to replace with like kind property costing at least as much as the net sales price of the old property.  When you trade down, you are required to report as taxable income the unreinvested portion or the actual gain, whichever is lower.

In your example, you left out a crucial figure, the adjusted cost basis (after depreciation) of the old property.  Basically, if it is less than $300,000, acquiring a $300,000 replacement property would result in some of the gain being deferred (rolled into the new property). 

If the adjusted basis is over $300,000, such an exchange would make no sense tax-wise, because the overall profit would be less than $700,000.

Something else to keep in mind is the fact that 1031 exchanges don't require a one for one swap.  The corporation could acquire multiple properties totaling more than $1 million and defer all of the profit.

The corporation's tax accountant should be able to work the various what-if scenarios, using the actual numbers, most efficiently for you.

Good luck.

Kerry Kerstetter

Q-2:

Thanks Kerry.

Do you do phone meetings for 15-30 minutes type thing for a fee?

Further details:

Parents have a realty company called T&J Realty.

They own the building.  Bought in 1975.  Mortgages all paid off.

I am pretty sure it is depreciated big time.

If they bought it for $300,000 back then.  What is the tax savings for this:

Building sells for 1.4 million in March 2006.

They buy smaller building for $300,000 in April 2006.

I know they get whacked by the state plus uncle sam big time on capital gains.  Over 30 % I think.

A-2:

Unfortunately, we are still too backed up to be able to accept any new paying tax or consulting clients.

The best person to do calculations such as you are requesting would be their normal corporate tax accountant, so that s/he can properly take into account the depreciation on the building, as well as any possible operating or capital loss carry-forwards that might offset some of the potential gain. 

Another option that should be considered is an installment sale, where a good portion of the sales price is carried back in a note.  This will allow the taxable capital gain to be spread out over the next several years; ideally keeping it in lower tax brackets than would be the case if all of the money is collected in the first year.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 12/21/2005 12:39:00 PM Send this post: