Capital gains tax

11 Replies

Does the gain on the investment property needs to be reinvested only to prevent the capital gains tax or the final selling amount needs to be reinvested. One of my friends told me that the gain needs to be reinvested only. Need clarification

Raj

All of the gain needs to be exchanged tax deferred into one or more properties. If you do not use all the excess funds you will have BOOT and be taxed on it. You also need to use a qualified QI and do not touch your funds in anyway or later on the IRS can disallow your exchange with an audit.

There are certain cost to buy and sell where you can use some of the proceeds for. Get with a 1031 exchanger for more detailed info.

No legal advice.  

To be more specific, yes the full sales price, less closing costs, needs to be reinvested along with all of the cash received from the sale.  Example:  $300k sales price, $20k sales costs and commissions ($280k net proceeds) with $100k cash received from the sale ($180k in mtg.s).  The replacement property must be $280k minimum, and all of the $100k cash reinvested in the replacement property.  The amount of the actual "gain" doesn't affect the amount required to be reinvested.  These are the basics, there are some minor adjustments like closing costs on the replacement property, etc.

Thanks Joel and Wayne .

So it means that every time I but a new property , then it would have to be higher cost than the previous one

So it means that every time I [buy] a new property , then it would have to be higher cost than the previous one

Higher cost than the net selling price of the property being exchanged.  Lets ask @Bill Exeter  for his input.

Talking about capital gains :
Repairs on the house along with the closing costs and real estate fees are excluded from the cApital gains tax?? Or any expenses on the house ?

I recently talked with a Professional Exchangor, and she told me the rules have changed. (I used to do many exchanges.) 

She told me you now have to hold the Subject Property for a year. Her company does nothing but facilitate exchanges. I would sure like to hear someone tell me this is not true.

Hi Raj,

The exact technical requirement is that you must buy one or more replacement properties with a total/combined purchase price (purchase price plus routine purchase expenses) that are equal to or greater than your net sale price (gross sale price less your routine selling expenses), and you must reinvest all of your net proceeds/cash/equity generated by the sale of your relinquished property.

The "routine" selling or purchase expenses include real estate broker's commission, title costs, escrow costs, recording fees, exchange fees, etc.  Lender related costs, charges and payoff expenses, and operating expenses such as prorated property taxes, prorated rents, paying security deposits to buyer, etc., are not included.  Non-routine (i.e. non-permissible) costs paid with exchange fund will be classified as taxable boot.

The more common questions we get are:

  • Can I pull out the original cost that I paid for the house?  The answer is no, you must trade equal or up in value and reinvest all of your cash.  You can pull cash out, but it will be taxable.  There is no way to pull cash out at the closing or through the exchange transaction without incurring taxable boot.
  • Can I be reimbursed at closing for certain repair costs that I paid to get the property ready for sale?  No, these are repair/maintenance expenses and not selling expenses.  The reimbursement of these costs will be considered a taxable event.

The key is that the government is essentially telling us that as long as we remain fully invested they will allow us to defer the payment of our taxes.  In the example used above in another post, the net sale price was $280,000.  In this case, the investor owns an asset worth $280,000, so as long as he or she reinvests at least $280,000, then they have remained fully invested.

Correct me if I'm wrong...  After the the exchange is done I go back and refi pulling out the money that I couldn't take at closing, that would be allowed correct?

There are some time restrictions on that too.