Posted by Rosemary on November 26, 2002 at 17:35:00:
Well, lets say I get someone who is paying cash or has good credit and was pre qualified. Now lets say I need to close on the new property (replacement for the 1031) in 3 weeks. Is it possible to close the first condo with a 1031 within that time frame.Just trying to figure out when I’ll reach the point of no return, or in this case, the point at which I will no longer be able to pull off the 1031. If we get an offer too late to accomplish the capital gains savings should we still go ahead with the sale or turn it down.
Posted by Rosemary on November 24, 2002 at 12:38:25:
Facts: Purchased Florida condo 10 yrs ago for investment. Paid off mortgage and decided to sell and to upgrade to a larger condo, new construction, closeing within the next 30 days (end of year).
Decided to sell existing condo 5 months ago on 1031 exchange but now we are too close to closing without a sale of first condo. Lowered the price below market but no sale. Running out of time. Have been told 1031 reverse is too complicated and expensive. Realized gain on the first condo would be @$120,000. Guess we’d pay about $25,000 in taxes.
Questions?
Should we hold first condo and continue renting it and get a mortgage on new unit?
Maybe sell it at a later date and pay the tax (we would probably not try the 1031 again)after making more money on rentals and maybe sell for more money?
Posted by randyOH on November 29, 2002 at 17:25:52:
Rosemary,
I may be missing something here, but it seems to me that this is a business/investment decision that you need to make. The tax issues seem to be pretty straight-forward. Depending on when you close on the old condo, you could either do a regular 1031 or a reverse Starker. If you are interested in the reverse Starker, check out starkerexchanges.com. Diane has explained the tax treatment of cashing out or selling on contract. But only you can determine if you are better off with one condo or two. If you don’t mind the additional management responsibilities, you will probably make more money with two. If you want to keep both condos but minimize your management problems, you could do lease/options. But my main point is that these are very personal choices that only you can make.
Randy
Re: Pay Capital gain or hold on - Posted by Diane (TX)
Posted by Diane (TX) on November 24, 2002 at 14:54:48:
Rosemary-
Since you want to reinvest in like-kind property, I’d suggest you still pursue the 1031 exchange. Is the reverse exchange complicated? Maybe, but that’s why you pay experts to handle it for you. Expensive? Possibly, but probably a lot less than $25K in capital gains taxes.
Do a Google search for 1031 exchange and that will direct you to www.starker.com. They have a toll-free number you can call with questions.
Maybe you can use an option to buy the replacement property and exercise the option within your time frame (a 1031 has to be completed in 180 days). Maybe you could interest your tenant at a good price (sales price less RE commission you’d pay).
If you do cash out, the capital gains tax isn’t paid at closing. If it’s a cash sale, all the tax is paid with the tax return for the year of sale. If it’s sold on a note, you’ll pay the tax over the note collection period (except for depreciation recapture, which is due all for year of sale). Depreciation recapture means that if part of your gain comes from the depreciation deductions you’ve taken over the years, that will be taxed at a higher rate than the 20% capital gains rate.
Re: Pay Capital gain or hold on - Posted by Rosemary
Posted by Rosemary on November 24, 2002 at 20:31:22:
Still don’t think I want to attempt the reverse.
What is the shortest time frame for a closing?
Can we close in less than 10 days?
If we get a buyer and are able to close before obtaining the relacement property (by the end of the year)we might still be able to do the 1031. Otherwise I think we should pull the condo off sale and hold on to it.
We are looking into qualifing for a mortgage on the new condo. We might still be able to get the old condo rented for season.
Read on this board somewhere that since we will eventually have to pay the gains (since we may not want to continue the reinvesting process) might as well do it now and get it over with.
One last consideration, we also own another condo near our home and thought that some day we could sell it along with the old condo, invest in a larger one, rent it for 2 years (to save the capital gains) than change status to permanent residence and sell our home.
Would this solve the problem of paying the capital gains?
Investment wise we won’t lose any money and may be able to come out ahead in the long run.
Re: Pay Capital gain or hold on - Posted by Diane (TX)
Posted by Diane (TX) on November 25, 2002 at 07:11:45:
“What is the shortest time frame for a closing?
Can we close in less than 10 days?”
Yes. For a 1031, you can close the same day or up to 180 days after the sale of the first property.
“since we will eventually have to pay the gains (since we may not want to continue the reinvesting process) might as well do it now and get it over with.”
Time value of money concept: a dollar paid now is more expensive than a dollar paid years in the future. Or you could die and have a tax-free basis step-up. This is your investment decision. Tax considerations are important but not controlling.
“we also own another condo near our home and thought that some day we could sell it along with the old condo, invest in a larger one, rent it for 2 years (to save the capital gains) than change status to permanent residence and sell our home.”
Good strategy on the permanent residence. To change to a permanent residence, you have to live in a property for two years.
I’m not clear on what the 2-year rental accomplishes in this case.
Re: Pay Capital gain or hold on - Posted by Rosemary
Posted by Rosemary on November 25, 2002 at 18:01:07:
Well, if I sell the two existing rental properties useing a 1031 to purchase a larger unit, I would have to rent it for awhile (I had heard about 1 or 2 years)to have it qualify for the exchange, right?
Then I would eventually move into it and make it my permanent home and sell my current home.
As far as my question regarding a closing, what I meant was if a buyer came up, say tomorrow, what would be the earliest (quickest)day I could set to close on the existing condo? I know that I have 180 day after that so I would have no problem there.