Q:

Subject: Exchange Question

Hello,

 

 I own with another family member (50/50) some open land that is being developed.

 

When it sells I expect cap. gains of about 250k.  If there is a mortgage lein against the property does that loan reduce the net cap. gains?  is the loan a cost?

 

or do I pay off the bank and then the IRS

 

otherwise would do an exchange or TIC

 

Thank you,

A:

You and the co-owner of that property are looking at some huge tax bills if you don't start working with a professional tax advisor to work out the best plan for your circumstances.

Paying off loans against the property will have no affect on the taxable gain.  Debt relief is considered the same as receiving cash in the eyes of the IRS.

If you are planning to do a 1031 exchange, you will need to reinvest a total amount equal to or higher than the net sales price, which will be close to the cash proceeds plus the debt relief.  While for most exchanges, this means that you will need to take on an equal or higher loan balance on the new property as you had on your old one, there are ways to have less debt if you invest more cash from other sources. 

If you and the co-owner have the current property in your individual names, you each have the option of doing a 1031 exchange on your share of the sale price regardless of what the other owner chooses to do.  If the property's title is in the name of a corporation, LLC or partnership, either that entity will have to do an exchange or you will need to have the property's title transferred into your individual names first.

Again, any experienced professional tax advisor can help you work out the actual numbers for your situation.

Good luck.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/19/2006 01:02:00 PM Send this post: