Posted by Dave T on November 09, 2002 at 11:00:17:
Bill, I think you guys are confusing apples with oranges.
This thread started with a discussion on the capital gains exclusion for the sale of a primary residence. A 1031 exchange is a completely different animal from the sale of a primary residence – different rules apply to the tax treatment for each transaction.
Owner faces Cap Gains Tax - Wants2Sell - Posted by TCR_Va
Posted by TCR_Va on November 06, 2002 at 20:11:16:
I have a potential lease purchase (sandwich lease) deal with an owner. She has a nice 3 bd/1.5 bath in a great neighborhood. She said she wanted to sell it but was told by her accountant that she would face large capital gains taxes. She moved out of the house and into another house belonging to her friend. She has not lived in her own house for 2 years now - she rented the house out to a regular tenant (who’s still there). She claimed with the goverment on her taxes that her house was a rental and NOT a primary residence. She was advised by her accountant that she would have to reclaim the house for two years now as her personal residence in order to avoid the capital gains tax.
She told me she may be interested in what I have to offer (a lease purchase-sandwich lease for 2 or 3 years) if I can get her past the tax issue. She just wants the mortgage payments made ($600/mo). Her one mortgage balance is $97k. Her asking price is $115k. Comps in the area are around $150k.
Is there ANY way that I can get her past this tax problem and sign up a deal?
Re: Owner faces Cap Gains Tax - Wants2Sell - Posted by David Krulac
Posted by David Krulac on November 07, 2002 at 13:32:46:
the owner needs to live there 2 FULL years of the last 5 years to qualify for the $250,000/$500,000 if married tax free capital gains. She might be able to move back in for some time to get her 2 FULL years of residency.
David Krulac
Central Pennsylvania
Offer to pay the taxes for her - Posted by Todd B (Va)
Posted by Todd B (Va) on November 07, 2002 at 09:43:01:
This will only work if the basis price on her house is not close to zero, otherwise the taxes will be too high.
I’m going to assume that her basis cost is 65k.
115k - 65k =50k
50k x 20% long term capital gain = 10k taxes
150k sell price, minus 115k cost, minus 10k taxes still leaves 25k.
Try to get the house sold within the 1st year and she will have no taxes, and you can make 35k. If you don’t sell it, you might be able to bump the price 10k next year and still make your 35k
Just make sure the house is really worth 150k.
btw - what part of Va are you in?
Todd B (Va)
Can’t get her past the tax issue… - Posted by JT-IN
Posted by JT-IN on November 07, 2002 at 07:39:00:
TCR:
Her acct is correct… Nothing to do with the fact that she has depreciated the property to this point, but the fact that she has now rented the house for 2 years currently, and now you want her to enter into a new 2 or 3 year lease… with option. The option presents no problem, but the overall timeframe of 2 years, plus 2 or 3 year new lease, will eliminate her from excluding the gain from taxes, if and when you do close on the property.
If she asked me how to proceed, the answer would involve something related to closing within the next year… and no longer. Figure out a way to structure a closing within that period, and you may have a winner here, by providing her what she wants and needs.
Just the way that I view things…
JT-IN
Re: Owner faces Cap Gains Tax - Wants2Sell - Posted by rm
Posted by rm on November 07, 2002 at 07:10:00:
Her accountant is wrong.
Tell her to get a second opinion.
Or, have your accountant locate a printed resource with an explanation of the rules in layman’s terms.
Re: Owner faces Cap Gains Tax - Wants2Sell - Posted by Nate(DC)
Posted by Nate(DC) on November 06, 2002 at 23:08:45:
How long did she live in the house? She only has to live there for two of the previous five years before the sale, to claim personal residence exemption. Example: she lived there for two years, then moved out and rented it for two years. She can rent it for one more year and sell and still owe nothing. However, if the sale takes place more than a year in the future she would not meet the two of five years test and would have to pay taxes or do a 1031 exchange.
NT
Re: Owner faces Cap Gains Tax - Wants2Sell - Posted by Bill Twyford
Posted by Bill Twyford on November 06, 2002 at 22:06:49:
TCR, the person only has to live in the house 2 calander years according to are friends at the IRS Example; you buy and move in Dec 20 1999, them move out Jan 4 2001 that’s 1 year and 15 days, However to the IRS that’s 2 Tax years. This is the same for 1031 exchanges. Call me Bill Twyford 303-838-5488. I never write emails, maybe I’am sick!
The slowest typer in the world
Bill Twyford
Re: Offer to pay the taxes for her - Posted by TCR_Va
Posted by TCR_Va on November 07, 2002 at 13:31:04:
I’m in Richmond.
Re: Can’t get her past the tax issue… - Posted by Andrew
Posted by Andrew on November 07, 2002 at 08:12:03:
JT,
How about getting her to sell on a Land Contract instead? Assuming she currently meets the 2 out of the last 5 requirement, would the land contract allow her to avoid taxes on the capital gain and just pay tax on the interest received?
Thanks,
Andrew
I disagree with you… or the IRS… - Posted by JT-IN
Posted by JT-IN on November 07, 2002 at 07:42:03:
Bill:
You should read IRS Publ 523, pgs 10 to 16… The timeframe is based upon 730 days… not in any case is it less, unless you have a special exception or hardship. Review the pages and worksheets in this pub to make it clear…
IRS Publ 523 found here:
JT-IN
Re: Can’t get her past the tax issue… - Posted by Diane (TX)
Posted by Diane (TX) on November 07, 2002 at 17:26:33:
Andrew, IMO the land contract is the best answer. JT-IN is right when he says that the rental is not a problem (it was only two years). The problem is that an option is not a closed sale. The sale HAS TO CLOSE roughly within one year to avoid your seller’s tax problem. When the tax code gives number of days, it means EXACTLY. One day off can kill your result.
Selling on a land contract (or contract for deed) should be considered a closed sale. For example, in an old Texas case, an investor agreed to pay the property taxes, insurance, and mortgage. Equitable title was considered to have passed although the buyer didn’t formally assume (and seller was not released from his direct obligation under) the mortgage. (Pomeroy, Ivan, (1970) 54 TC 1716.) In that case, the transaction was considered a closed sale.
Consider the contract for deed. A cheap way for you to check out this advice would be to present this as an offer to your seller, and have her run it by her accountant.
Re: Can’t get her past the tax issue… - Posted by JT-IN
Posted by JT-IN on November 07, 2002 at 15:43:32:
Andrew:
I’m not entirely certain of the answer… good Q though…
So, what I do when I am faced with tax Q’s that I don’t know the answer to, is to ask this Q of one of the “Tax Gods”… aka John Hyre. He’ll likely get right back to us with a cognitive answer.
JT-IN
Re: I disagree with you… or the IRS… - Posted by bill twyford
Posted by bill twyford on November 07, 2002 at 08:27:20:
I agree with you. Them writing it and enforcing it are two diff things, it’s one of those laws that they really don’t enforce much. Ive done 40-60 1031’s and that’s how the exchange company plays the game.
Thanks for bring that to our attention.
Are you going to the Ohio REA Nov 15-17 in Columbus?
Call mev 303-838-5488 Bill
Wow…watch out beginners! - Posted by Peter_MD
Posted by Peter_MD on November 07, 2002 at 09:27:56:
Bill:
I’m concerned that we are posting misleading information on this board that is relied upon by the beginners.
The IRS has their ways of enforcing the requirements of this code (two full years…day for day within the past 5 full years…day for day). The property must be held as a primary residence, in this example, until December 16, 2001. There are a few exceptions, but a good accountant should be knowledgeable enough to know the rules.
If someone uses an accountant that provides relative tax or accounting information that differs from general knowledge or seems unclear or confusing, the individual should keep asking questions to get a satisfactory answer and/or seek a second opinion from another source.
A note to especially beginners. Don’t great creative with accounting or the tax code. Violators will jeopardize their entire business and the time, effort, and expertise needed to correct the problem that was created could put a quick end to the investor.
My advice, just pay the taxes (or in this situation, the seller should pay the taxes), if required, and go out and get more deals designed to solve problems…not to create new one for you AND the seller.
You’re not a creative salesperson. If this situation is a problem for the seller, they either need to get over it, find an acceptable solution (within the existing rules and regulations), or you (as a professional real estate investor) should move on.
Just the way I view this issue.
A professional in accounting and taxes should be well worth the amount they charge…if not, in my opinion…find one that is.
Re: Wow…watch out beginners! - Posted by Bill Twyford
Posted by Bill Twyford on November 07, 2002 at 16:25:17:
Peter, I agree with you 100% I’am not telling people what to do I’am just letting them know what the 1031 exchange corps are tell us, when we do exchanges.
Bill Twyford