Posted by ADAMSD on December 17, 2001 at 11:45:02:
I was wondering if someone would give me any info on this example. Say, for instance I bought a house for $75,000. I knew I was going to recieve $100,000 for the house when I sell it in a few months. Would it be legal for me to take a $25,000 2nd mortgage on the house and have it repaid by my seller so the actual difference is then tax-free. Please help me with this question.
Just a few minutes ago I responded to a similar question. So this response is a “recycled response.” I say this in the interests of full disclosure.
It would be easy for me to answer your question. I’m not going to do. However, I will give you some guidance on how to think.
If it were possible to wipe out a profit tax by just borrowing money secured by the property, how many people do you think would be doing it? What are the chances, do you think, that you would not have heard of this already? I know that the government tax laws are convoluted and massive. But, what do you think are the probabilities that the government would let you get away without paying tax just by borrowing some money? Why would there even be a 1031 exchange if you could avoid tax on a property sale just by borrowing out the purchase price of the property?
Do you think you can answer your own question now?