1031 Exchange/Capital Gains Inquiry

[Steve Dowding]

Hello Everyone,

Earlier this month, I sold a property that I had been on title for since 2003 via joint tenancy with right of suvivorship. After the death of the other joint tenant last November, I updated the title to reflect myself as the sole owner (not sure if this makes a difference or not in determing my basis for the property). In the sale of the proerty earlier this month, I established a 1031 exchange in order to defer the capital gains from the proceeds. With the sale of the property which was 305k, I was left with 174k in proceeds after the loan on the propety was paid off (the loan was not in my name but only in the deceased joint owner's name).

Based on conversations I have had with the 1031 company, they state I am liable for capital gains for the entire sale amount of the property rather than just the proceeds from the sale. I had already planned on reinvesting the entirety of the proceeds from the sale into replacement properties, but even with doing so, I am looking at being liable for gains on roughly 130k if this information is truly accurate. I have tried to confirm this information by reading up as much I can about 1031 exchanges and capital gains taxes, but have had trouble finding information that provides any definite clarity on my specific situation. 

I have already begun researching possible options in which I can ensure I invest into replacement properties that equal as close to 305k as possible including hard money (as I am not eligible for coventional lending due to a dischared BK 3+ years ago until October). Before I go down the road of taking out a hard money loan (still a much cheaper short term option that the federal and state gains I would incur if the above is true) I just wanted to confirm that I was not given misinformation.  Although I do plan on conferring with a CPA regarding my specifc situation in the coming days, any additional insight into my 1031 exchange/capital gains situation would be greatly appreciated. 

[Bill Exeter]

Hi @Peter Mckernan, 

Thank you for the shout out!  

Hi @Steve Dowding, 

Initially, you each had "basis" in the property.  Upon the co-owner's death, you now own 100% of the property.  The first question is whether you received a step-up in cost basis on the co-owner's part of the property that you now own.  You would not have taxable gain on your co-owner's part of the property if you received a step-up in cost basis, but would have a taxable gain if you did not receive a step-up in cost basis.

However, doing a full 1031 Exchange on the entire property would defer all of the taxable gain, so I'm not sure what your Qualified Intermediary was talking about regarding your co-owner's part of the property.  

They may have been talking about the reinvestment requirements in generally where you must reinvest the Net Sale Price (Gross Sale Price less certainly routine selling expenses) and not just the net equity or net proceeds.  It looks as if your Gross Sale Price was $305,000, so your Net Sale Price is likely around $280,000 (ish), which is the amount that you must reinvest.  You would defer all of your tax liability as long as you traded equal or up in value based on the Net Sale Price (e.g., the total purchase price of the new replacement properties must be equal or greater than $280,000 (ish)) and you reinvest all of your net proceeds.