Before you sell property, it may be a good idea to talk with your CPA or tax preparer about two critical points:
(1) What is your *adjusted basis* in the property that may be sold off?
NOTE: If you 1031 exchanged into this property, your basis will be lower than your *cost*, because of the deferred gains from your previous 1031 exchange. (You may have a reduced basis if this was part of your replacement property.)
(2) What is the *amount of gain* that you would realize if you just sold the property outright?
An important tax-fact to remember is that "taxable gain" is NOT determined by how much proceeds you receive. If your lender takes all of the proceeds in order to agree to release its lien on the property, you may still have a taxable gain. This is because "gain" is determined by:
Purchase Price
- (subtracted by) Adjusted Basis
__________________
= Gain
I often see sellers with little or no cash proceeds, and they are surprised to have realized a taxable gain. This is because they have debt on their property that is being sold (this debt has to be satisfied in order to convey marketable title). "When a capital asset is sold, the difference between the ‘basis' in the asset and the ‘amount it is sold for' is a capital gain or a capital loss." Check out http://www.irs.gov/taxtopics/tc409.html
It is really important to focus on your basis in the property, because this is what the IRS looks at.
The two most frequently used tools for deferring taxes when you sell property are: (1) Section 1031 exchanges and (2) Section 453 installment sales. One variation of an installment sale is a Deferred Sales Trust (also called a "DST").
1031
In a 1031 exchange, a person can defer recognition of capital gains by assigning their sales contract(s) to a qualified intermediary ("QI") according to a written exchange agreement. Then that person can receive like-kind replacement property that is properly identified and purchased through thier QI. This way, the person is insolated from receiving the sales proceeds, because the QI holds the money (according to the ‘G(6) limitations') between the sale of the old relinquished property and the receipt of the replacement property.
DST
Alternatively, in a Deferred Sales Trust, the person's property is transferred to a DST trustee (in exchange for a written installment agreement), so that the trustee can then immediately sell the property and retain the sales proceeds. A person may defer the recognition of the capital gains taxes, because the trustee is buffering the person from receipt of the sales proceeds until a future date when the periodic payments are actually paid-out by the trustee and received by the person.
Before you sell property, let's talk on the phone...and if you can arrange it, perhaps conference in your CPA or tax preparer. That way we can make sure that this is a good fit for you. My toll free number is 1-877-373-1031.
© 2011 Jeffrey R. Peterson - All Rights Reserved
Jeffrey R. Peterson is President of Commercial Partners Exchange Company. His company is a facilitator of standard deferred 1031 exchanges, build-to-suit construction improvement exchanges, reverse exchanges and aircraft personal property exchanges. Mr. Peterson is an adjunct professor at William Mitchell College of Law and a frequent speaker and CLE presenter throughout the Midwest for various business and professional organizations on numerous issues related to 1031 exchanges.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
http://www.jeffpeterson.name/Deferred_Sales_Trusts.html
Disclaimer: This material has been prepared for general informational purposes only. It is not intended to, and does not, constitute legal advice.
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