Avoid Huge Capital Gain - Posted by Sara_CA

import · February 15, 2005, 9:37pm

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import · February 15, 2005, 9:37pm

Posted by Sara_CA on February 15, 2005 at 22:37:02:

My elderly mother and I jointly own, with rights of survivorship, a large farmland/no house in California. (I have other siblings.) I have since split the land into two parcels. The value of the land has gone up tremendously. I am thinking about selling one of the parcels to pay off the mortgage, and invest in other properties. The other parcel will be free and clear, and good for holding. Problem is we will have over one million capital gain after this half sells. I have two questions:

My mother is on social security income. Would it be smart to sell the half in 2008, so that she can qualify for free capital gain tax due to her low-income status? I have read that by 2008 low income individuals do not pay any capital gain. Is this true?
If we choose to do a 1031 exchange with other real estate to avoid huge capital gain tax, can I charge $30K during escrow for ¡§Consultation Fee¡¨ for finding and arranging the purchase of the property, doing the split with the county, leasing the property to tenant farmer, and help with the eventual sell of the half of the property? Is this a good way to take SOME money out for her living expenses without triggering the huge capital gain? My escrow officer said I need a license before she can let me charge a consultant¡¦s fee during escrow. If the answer is to find another escrow officer, can someone recommend an escrow officer in Northern California?

Thanks in advance for any expert advise from this excellent forum. I appreciate this opportunity to learn. –

import · February 17, 2005, 3:08pm

More info on avoid Huge Capital Gain - Posted by Sara_CA

Posted by Sara_CA on February 17, 2005 at 16:08:31:

Thank you Mr. Krulac for your expertise. Thank you for this great forum.

1.The possibility of owning it by inheritance. Will this trigger the inheritance tax, or estate tax? How can I avoid death related taxes? I have an additional complication in that I am included in the title because I did all the work related to the property, but mostly because I am a single mother. This has already created difficulty with the in-laws of my siblings. I do not wish to break family relations.

2.The possibility of refinancing to get cash out. The current mortgage was previous owner seller financed at 6% for $450K. It does not show up on any credit report at all!! I don’t think I can take mortgage insurance because the mortgage does not show up anywhere except in the county recorder¡¯s office. I don¡¯t think we will qualify for re-financing, in spite of high credit score 800, because of social security income, and low hourly wage job. In addition, raw farmland is normally financed at only 50% at the Farm Credit Bureau. Yes, the land prices keeps escalating, but it looks to me I must sell the one parcel because I am not able to keep on paying this mortgage. And I want money out to invest other properties. Please give any expert advise how elderly mother and I 50/50 can do this better next time. Thanks so much.

3."take it tax free as excess financing on the 1031
property that you exchange into.¡± How can I do this? Can anyone explain to me? Thanks so much.

import · February 16, 2005, 5:51am

PS stepped up basis NO TAXES DUE… - Posted by David Krulac

Posted by David Krulac on February 16, 2005 at 06:51:10:

if you inherit the property you wouldn’t owe ANY of the $million capital gains. I see this so often where people transfer the property before inheritance and trigger big capital. It is not the way to go. One possibility for you is to transfer the property back to your mother and let her give it to you by inheritance.

Another factor is selling the one parcel. If land prices are continuing to escalate inyour area, you could profit more by holding the property. And to raise the capital that you want for investing, you can refinace the farm at today’s low interest rates and use the proceeds for investing. In addition you could easily get an 80% loan on the entire farm and for added protection get an insurance policy to pay off the mortgage in the event of your mother’s passing. In an escalating market I would hate for you to sell now and miss out on future appreciation.

import · February 16, 2005, 5:41am

Re: Avoid Huge Capital Gain - Posted by David Krulac

Posted by David Krulac on February 16, 2005 at 06:41:21:

I’m not sure about 2008
You don’t want to take a consulting fee, for one it will be taxed HIGHER than the capital gain. If you want $30,000 take it as capital gain and the tax would be 15%. Or you can take it tax free as excess fiancing on the 1031 property that you exchange into.

import · October 31, 2005, 12:14pm

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