Ran into a partial exchange situation, I am selling a condo at price of 400K, the profit is only 20K however the depreciation is super high since I have been renting it for 7 years. so I have to pay high tax for it. My agent found me a property which I plan to buy at 330K. my CPA said it is not worthy of exchanging since most of my tax incurr from depreciation rather than profit of selling.
My agent think it is worthy of partial exchange. I am so confused.
What will be better way to go partial exchange or no exchange?
Thank you in advance!
Since you mentioned "profit" and you further brought up that depreciation is super high since you were renting it.
I will assume the original purchase price was $380,000 and you were depreciating it the past 7 years and now your taxable gain is $116,727 calculated as follows.
400,000 - 380,000 - 96,727(depreciation at 7 years assumed brought on jan 1 and residential building) = 116,727.
Your agent is referring to section 1231 of the Internal revenue Code where the IRS allows you to DEFER gain on an investment property if you sell and acquire an investment property.
The code calls for very strict rules on when you need to choose your new property once your property is sold. It may also call for the use of a qualified intermediary.
However, you may not be able to defer all the gain since the property you want to acquire($330,000) is less than the property you are selling($400,000).
If you want to avoid all of the gain you may need to look into buying a property valued at or above $400,000 or look to also purchase a property around $70,000 in addition to the $330,000 house.
let me know if you have any other questions.
As he mentioned, in order to defer all tax in a 1031 exchange you must purchase at least as much as your net sale. Any amount you buy down or any cash you take out is considered to first be a dollar of profit. So you would pay tax on the difference between 330 and 300 or $70K
But using Basit's numbers you would still shelter the tax on the other 46K and since that is mostly going to be depreciation at 25% and you have the CA state taxes to defer you'll probably still be saving around $14K.
Now another answer would be to buy two properties so the total was more than 400K. That would defer all tax on the $116K.
So in your scenario you'll pay around $34K ish and shelter $14K ish. Is it worth it depends on your preference, plans for the money, and if your acct. has something else they're thinking of that will offset your tax.
The formula above somehow doesn't make sense.
400,000 - 380,000 - 96,727= -76727 negative amount shouldn't be 400,000-(380000-96272)?
thank you for both of your advice, I will look for another property then .