1031 Exchange

[FlyingRon]

I agree with LIDJ. The poster seems to not understand what a 1031 exchange is. Understand, a 1031 doesn't get you out of paying tax in any circumstance. At best it allows you to switch like kind properties without incurring an immediate tax bill. All that gain that would have been due immediately is deferred until the eventual sale of the new property. Further, as others have pointed out, you should have been depreciating the rental property and you're going to have to recapture that depreciation (whether you took it or not) on the sale.

As pointed out, you don't qualify for a regular 1031 or a reverse 1031 and there's no scamming you can do with deed shenanigans to change that. I suggest you sit down with a competent tax adviser and work out your strategy going forward.

 

[nraa3669]

Thanks. What about taking more equity of the Rental? would that help.
What about doing a quit claim of my rental to daughter. Can she claim that her primary as she is already living there for 4 years.

 

[LdiJ]

Thanks. What about taking more equity of the Rental? would that help.
What about doing a quit claim of my rental to daughter. Can she claim that her primary as she is already living there for 4 years.

But she did not own it those four years, and you would still have to deal with the sale of the property on your tax return...because quit claiming it to her would be a sale of the property. You would also likely have to file a gift tax return as well. You probably would not owe any gift taxes, but you would have to do the return.

Look, you are simply not going to get out of paying capital gains and recapturing depreciation. You really just need to accept that.

 

[nraa3669]

I agree with LIDJ. The poster seems to not understand what a 1031 exchange is. Understand, a 1031 doesn't get you out of paying tax in any circumstance. At best it allows you to switch like kind properties without incurring an immediate tax bill. All that gain that would have been due immediately is deferred until the eventual sale of the new property. Further, as others have pointed out, you should have been depreciating the rental property and you're going to have to recapture that depreciation (whether you took it or not) on the sale.

As pointed out, you don't qualify for a regular 1031 or a reverse 1031 and there's no scamming you can do with deed shenanigans to change that. I suggest you sit down with a competent tax adviser and work out your strategy going forward.

Ok thanks. I was just trying to save for my retirement as I already invested on my new primary. I agree I have very little understanding on 1031 exchange.

 

[nraa3669]

But she did not own it those four years, and you would still have to deal with the sale of the property on your tax return...because quit claiming it to her would be a sale of the property. You would also likely have to file a gift tax return as well. You probably would not owe any gift taxes, but you would have to do the return.

Look, you are simply not going to get out of paying capital gains and recapturing depreciation. You really just need to accept that.

Ok thanks. we had not claimed any depreciation on the property. We just had the property for my daughter to make a living and now that we are retired we want to have some money in the bank

 

[LdiJ]

Ok thanks. we had not claimed any depreciation on the property. We just had the property for my daughter to make a living and now that we are retired we want to have some money in the bank

What do you mean by "for your daughter to make a living". You called it rental property. Are you saying that you never had tenants in the property?

 

[HRZ]

As an aside ..renting out a unit wo profit motive is a sure way to have any net operating loss disallowed if audited . And as far as I know you are still required to depreciate rental property even if the rent is zero.

And if you need retirement funds you might think about more productive use than of your existing assets that trying to twist the tax code or the state homestead requirements .

 

[nraa3669]

What do you mean by "for your daughter to make a living". You called it rental property. Are you saying that you never had tenants in the property?

Yes. We never rented it to any outsider nor did we collect any rent from my daughter.

 

[LdiJ]

Yes. We never rented it to any outsider nor did we collect any rent from my daughter.

Well, then I agree that you do not have to worry about depreciation, its just a second family home (assuming that you did not take any rental losses on your tax return). In that case, you will just have capital gains tax.

Now, what you still need to realize is that you will not pay capital gains tax on the entire proceeds. You will pay capital gains tax on the difference between your original purchase price plus major improvement, and the selling price minus selling expenses.

Here is an example:

House sells for 200k. There is no mortgage. The original house was purchased for 120k and you added a 20k new roof. That makes the basis 140k. The selling costs equal 20k also, so the net selling proceeds are 180k. 180k-140k = 40k The 40k is your capital gain and you would pay capital gains tax on that. For most people, that would be 6000.00.

 

[nraa3669]

I have an equity loan on the property.
On the above example if the sale price was 250K but the mortgage was $50K. All other assumption remain the same. Would my capital gain be 40K

 

[LdiJ]

I have an equity loan on the property.
On the above example if the sale price was 250K but the mortgage was $50K. All other assumption remain the same. Would my capital gain be 40K

If all else was equal, yes. Your numbers of course will be different than my example, but yes.

 

[nraa3669]

Ok thanks a lot for all the explanation.
One last question. What if I take some more equity loan on the property. Say in the above example I take another 40K equity loan. Would it make my capital gain zero. How long before I sell the property equity loan is considered?

 

[HRZ]

OP you may be missing the ability to take modest losses on your rental property by not charging .your daughter a realistic rent ...and depending on how big your real estate taxes are, if they a big , you may be very unhappy starting with your 2018 return to have a lot of nondeductible taxes on personal residences. And if you want to mprove your financial picture...charge rent.

BTW...for us much older folks...gains locked in 1031 situations do have one " free" exit...you die and your heirs get free stepped up basis ...but that's not everyone's goal!

 

[HRZ]

Loans are not part of capital gain math!

 

[nraa3669]

I just gave that as an example. I am going to have a huge tax on the capital gain and I am just trying to reduce it a little.
as for charging rent, my daughter was a student and has just started a job. She will be moving out to a affordable location.
Did you mean that the equity loan cannot be adjusted to the sale price.