Should I do a 1031 Exchange here?

[Mark2365]

What is the name of your state? Arizona.

I bought a vacant land parcel for $20k four years ago.
I bought a different INVESTMENT property ("like kind") Four months ago, for $21k.
I'm now in escrow to sell the vacant parcel for $51k.
The question: Can I / Should I use these two properties in a 1031 Exchange,
in order to delay capital gains taxes?
For a 1031, the two properties must be:
"identified within 45 days" That can work.
"closed within 180 days" That can work.
Both properties are in Arizona, where I live.
I assume that my income is a factor in the decision.
My only income nowadays is $1142 monthly from SS.

Your thoughts?

Thanks very much for your time, people.

 

[adjusterjack]

There would be no tax advantage.

$10,000 in capital gains on the two properties might cost you $1000 to $1500 in tax which would be eliminated by the standard deduction which is $14k or $15k this year.

$31,000 in capital gains on the one property might cost you $3000 to $4500 in tax which would still be eliminated by the standard deduction.

A small portion of your SS might be taxed if you sell just the one property. But, again, the standard deduction eliminates that.

The cost of a tax pro to set it up for you would be a big hit.

I vote no.

But you might get some cheap tax software and run some scenarios to verify what I'm telling you.

If you keep one property and strike oil you're not going to care much about taxes.

And stick around and see if the tax attorney weighs in on this.

 

[LdiJ]

What is the name of your state? Arizona.

I bought a vacant land parcel for $20k four years ago.
I bought a different INVESTMENT property ("like kind") Four months ago, for $21k.
I'm now in escrow to sell the vacant parcel for $51k.
The question: Can I / Should I use these two properties in a 1031 Exchange,
in order to delay capital gains taxes?
For a 1031, the two properties must be:
"identified within 45 days" That can work.
"closed within 180 days" That can work.
Both properties are in Arizona, where I live.
I assume that my income is a factor in the decision.
My only income nowadays is $1142 monthly from SS.

Your thoughts?

Thanks very much for your time, people.

I believe that it is too late. A 1031 exchange has to be done through a special kind of third party who specializes in 1031 exchanges. You have already bought the second property and you bought it without using the special third party. Your income wouldn't matter in a 1031 exchange but it would matter in regards to whether or not you actually had to pay any capital gains tax.

For example, the zero percent capital gains rate applies to anyone who is single and has income under $47025 (for 2024), which would include the gain. Even allowing for 85% of your SS benefits to be treated as taxable income that leaves you over $35,000 in capital gain before you get above the zero percent capital gains rate. You aren't going to have that much capital gain on the first property so the cost of attempting a 1031 exchange, even if you could meet the criteria, would be wasted.

 

[Taxing Matters]

There would be no tax advantage.

I agree, but your explanation of why isn't technically correct. The error I see is that you are subtracting the standard deduction from the tax owed, which is not the way it's done. I suspect you know that and were just hasty in your replay. But for others reading this thread that is an important distinction. The standard deduction reduces the taxable income, not the tax. The martial status matters, of course, in determining the standard deduction. For 2024 the standard deduction for a single person or a person filing as married filing separately is $14,600 and for a married couple filing a joint income tax return, the standard deduction is $29,200. But as you'll see, the standard deduction isn't needed to know what impact the sale will have in this particular circumstance.

The reason no tax would be owed is that the long term capital gain rate for single persons with income less than $47,025 has a zero long term capital gains tax rate, and a married couple filing jointly would have a zero long term capital gains if their combined income is less than $94,050. The OP's gain of $31k and $13704 in Social Security will be all the income the OP has.

The IRS states the rule for determining if any of your Social Security is subject to tax as follows: "Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status." The base amounts are:

• $25,000 if you're single, head of household, or qualifying surviving spouse,
• $25,000 if you're married filing separately and lived apart from your spouse for the entire year,
• $32,000 if you're married filing jointly,

One-half of the SS benefits, which comes out to $6,852, plus the $31k comes out to $38,852. That is over the base amounts for both single and married couples filing a joint return, meaning some of the Social Security will be taxable income. If the OP is single, then approximately $7,774.00 of the benefits are taxable, using the IRS Social Security taxable income calculator and making some assumptions since I don't have all the information. I also had to use the 2023 computation as the IRS has not put 2024 up on the calculator. Repeating the same exercise for a married filing joint return the taxable portion of Social Security came out to $2,926.00. Again, this is just an estimate; the actual numbers will very likely be a bit different.

For a single person, that makes for total income for the the year the 31k gain + 7774 taxable Social Security = 38774. For a married couple, it's 31k gain + $2,926 = 33926. As those amounts do not exceed the zero percent tax limit, all the gain is taxed at 0%. If any assumptions I made are not correct or the information provided isn't complete then that will change the numbers and potentially some gain might end up taxed, but there would have to be some other income not mentioned to go over the zero percent long term capital gain tax rate.

Note that the standard deduction did not come into play at all with this computation. It's not necessary in this case to take that extra step to know the impact of the gain if reported on the 2024 return rather than doing a § 1031 exchange. Again, though, my numbers are just an estimate based only only on the information provided and making a few assumptions for missing information needed to run the numbers.

In any event, as LdiJ noted, it's too late to do the §1031 exchange because the taxpayer cannot take possession of the sales proceeds from the property being sold. The moment he/she does so, that's going to blow the § 1031 exchange. Thus the time to decide on a § 1031 exchange is before you sell or trade the property involved. That allows you to get the qualified third party intermediary needed to handle the money, and of course the intermediary is going to charge for that. That expense would be wasted here even if it were still possible to do the exchange.

 

[Mark2365]

Wow.
THANK YOU, gents,for the extremely clear and concise and thorough explanations.
I think you've covered every detail nicely.
FWIW, I'm now single, but that apparently is now irrelevant.
Minimal (or zero) tax liability for me. Cool.

Technically, I hadn't realized that I needed to Contract with a 1031
intermediary Before buying the 2nd property (four months ago).
Thus, a 1031 is now not available anyway.
I was assuming tat the 180 days thing could work retroactively.

Taxing Matters, I haven't yet Received the sale $ proceeds, but I expect them tomorrow.
Irrelevant now, apparently.

Thanks very much for your Time And Expertise, people.