Capital Gains TAX Avoidance

7 Replies

Hello all First post! My firm is purchasing a MF property from this couple in their mid 70s-80s. They purchased the property in 1992 and are looking to avoid paying capital gains tax on the property. What would be the best course of action to close this deal (besides 1031 exchange). They purchased this property for 2.2M and we are buying for 3M. Thank you!

@Gjon Rexha

Hi Gjon - Welcome to BP!

Did the couple use the property as their personal residence?
they should have $500,000 of gain exclusion if they lived in the property.(1031 would not apply in this case)

If they used this property as a rental property - they are pretty much fully depreciated.
2017 - 1992 = 25 years.

They can look into doing an installment sale which would spread the tax(and payments) over several periods.

They could sell the property to me for $100,000, which would be below the remaining depreciation, and I’ll sell it to you for 2.9million. They can avoid taxes, you get a better deal, and I will NOT complain about the capital gains tax at all
That’s a Win-Win-Win, if ever there was such a thing.

Actually I don’t have a clue, but I did have a joke, so I contribute whatever I can.

would seller financing of the deal allow them to collect a smaller amount in a longer term that might at least alleviate the lump sum payment/ capital gains?

Thank you for the response Basit! They did not use the property as a personal residence. I have to get more information on their capital accounts and cost basis - but if they remained as a 1% LP partner would that have the potential to defer capital gains as well pending viable information?

Pat You are a funny guy and Ryan - I explored that option with them but thank you. I am trying to do some creative financing. 

A Monetized Installment Sale is one approach they could use to defer the gain and still get cash after closing. This is a great alternative to a 1031 exchange when the seller doesn't want to stay in real estate. Assuming the property is in the US?

There are some more sophisticated charitable giving strategies they could also use. Not enough time to elaborate here. A lot is dependent upon their goals with the sales proceeds. 

Installment sale does not apply to the unrecaptured depreciation taken since May 1997 is collected in full in the year of sale.  Whatever depreciation was taken since May 1997 would be subject to depreciation recapture in the year of sale.  Hopefully, in this scenario, most of the allowed depreciation was taken prior to  May 1997.  An installment sale would delay payment of capital gains taxes until installments are received, and would be taxed at the long term capital gains tax rate in effect at the time the installments are received.  

It's anyone's guess whether the current administration's tax reform will retain the preferred tax rates for long term capital gains.

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