One or Two Property Closings required?

Question

I am the owner of 126.39 acres with two (2) homes  that I am privately selling. Ten years ago when I  built the second home, I subdivided out 5.63 acres from the original 126.39 acres to put with this home. Partly to prevent the bank from collateralizing the entire property with the small loan for this cabin and partly as a strategy for "options" should I need them in the future.

The remaining 120.76 acres also holds the other home that my mother resides in and that my father built for this purpose. She holds no deed to the home, and the home is legally mine.  As I plan my future investments, and future tax situation (capital gains) I am uncertain if I must do two closings, or if I most definitely would want to do two closings to capitalize and maximize tax savings and maximize other real estate investments, such as 1031 exchange, etc. This is essentially my "retirement" and will need investments, but will also need to purchase another home. I have owned this property 25 + years and could see a substantial "capital gains" hit. The home my mother is in, according to my CPA, looses any opportunity for tax benefit to me since it is not my residence. My mother cannot benefit, since she does not own the home. The home resale value is 300,000 + ...

Do I marry for the additional "deduction" benefit? :) Since one person is buying the entire property and both homes, do I legally have to do two closings? And countless other questions that to some, are already so obvious...

Thank You!

Denise Thomas · Answer

Thank you for your reply! Your points make perfect sense. The only other part that I am uncertain of is this:

What if the true costs of improvements to the 5.63 acres, (my residence) combined with my 250,000. deduction, exceeds the FMV of that portion of the property? Will I "loose" those tax saving dollars because they are "attached" to the residence? I am selling the entire property to one individual. I'd like to "shave" off as much cash as I can to allow me some diversity in investments other than 1031s.

I am new to 1031s and have been advised to do more than one with the proceeds from this sale. Mom would Not be part of the 1031.

Dave Foster · Answer

@Denise Thomas, You could go either way but there is no reason why you would have to go with two closings.  It sounds like you're wanting to allocate the primary residence portion to be as close to $250K of profit as possible.  And the rest to go into a 1031 exchange.

We do this often with one contract for sale and closing and you have your accountant allocate between the investment and primary residence portion.  Then make an addendum on the contract and settlement statement stating such an allocation.  Then at the closing the tax free cash from the primary residence allocation goes to you and the remaining proceeds go into your 1031 exchange.

There is no fixed formula other than that it must be rational and make sense.  Most common would be to back into an average cost/acre and add to that the value of the houses to each allocation.  Your goal is to get your primary as close to basis + $250K so you can maximize the tax free portion of the sale.  But again you want your acct. to use allocations that are defensible.

One other thought - although you split the remainder off from your primary make sure there was an investment rationale and not just providing housing for your parent.  That is not an investment motive.  Your mom may have lived in the property as manager or caretaker but you owned the property with the intent of holding it for productive use.