Capital gains avoidance strategies wanted - Posted by Ray Richardson


#1

Posted by Bud Branstetter on November 10, 1998 at 12:43:26:

Setting aside the legalities for the moment. It is not running the mortgage down on B from the proceeds of A. You trade(cash as intermediate form) the equity in A for the equity(amount above mortgage) in B. If there is not as least as much equity in B then B has the gain that he pays tax on. If A has more equity than B then A pays tax on that gain.

Ray, I still don’t know why A needs to be sold versus borrowing and installment contract.


#2

Capital gains avoidance strategies wanted - Posted by Ray Richardson

Posted by Ray Richardson on November 10, 1998 at 08:33:17:

My inlaws would like to sell a home (home A) that they’ve owned for years but no longer currently reside in. They own another property (home B) in which their mortgage very likely exceeds the capital gains they would receive on home A. Is there anyway to creatively use something like a 1031 exchange to roll the capital gains from home A into paying off some of the mortgage on home B and thereby avoid the capital gains on home A? Could they put home B into some other entity (a corporation or land trust or whatever) and then “buy” it from that entity with the proceeds from the home A sale? Or are there much better ways of handling this situation that I know nothing about? Any ideas would be greatly appreciated.

-Ray


#3

Re: Capital gains avoidance strategies wanted - Posted by Bud Branstetter

Posted by Bud Branstetter on November 10, 1998 at 11:21:38:

Ray, The formula to calculate taxable gain on the exchange includes mortgage balances. You are trading equities. If there is not the equity in house B there would be gain. Once you trade you can borrow on your new property to get cash out without a taxable event. But why not borrow on the existing house A then sell on contract so it become a installment sale and the gain is realized slowly.


#4

Re: Capital gains avoidance strategies wanted - Posted by Jimbob

Posted by Jimbob on November 10, 1998 at 10:56:21:

Ray,

If your inlaws sell home A, they will have 45 days from the time of closing to identify the next property they wish to invest in, they will then have 180 days to close the deal. If they do this successfully, they can avoid capital gains tax. This transaction must be done by a qualified exchangor or tax attorney, there are many loose ends that need to be tied up, and if you miss one, you’re out of luck. The profits from the sale of the investment property must be held by a third party and can never touch your hands or it becomes taxable or “boot” as known in the exchange world.

You did not mention whether or not property B was a primary residence or another investment property, therefore I cannot answer that question however, the profits or proceeds from the sale of an investment property cannot be applied to a primary residence in any way.

The rule of thumb is the property sold and the property being acquired must be “like kind” in other words, a rental house for an apartment building, a vacant lot for a shopping center, the bottom line is “investment for investment”.

There are many sources of 1031 tax deferred exchange information on the internet, try looking them up with a search engine.

Jimbob


#5

Re: Capital gains avoidance strategies wanted - Posted by Ray Richardson

Posted by Ray Richardson on November 10, 1998 at 12:11:44:

Here I go again, trying to see if I understand all of this business: if we assume for the present that both home A and home B are investment properties, and there is enough mortgage on B that I could apply all of the proceeds from the sale of A to paying it down without “running out of mortgage” as it were, is this a perfectly legitimate exchange, even if I already had some equity in B? In short, is trading my equity in A for MORE equity in B allowed? Sorry to keep pestering everyone. Thanks for your patience.

-Ray


#6

Re: Capital gains avoidance strategies wanted - Posted by Ray Richardson

Posted by Ray Richardson on November 10, 1998 at 11:57:28:

Thanks for the helpful responses. I’m still very new at this business so I’m afraid you lost me a bit Bud. Can you elaborate a bit on the “borrow on house A and then sell on contract” concept? Do you mean finance the sale of house A myself? And are you saying this is best done after I have borrowed all I can against the A property?

Sorry to be so dense but I’m still learning the lingo here. Can I just have that last bit again a little slower?

-Ray