Q:

Subject: Exchange Question

Yes, an exchange question…

I am debating 1031 vs cap gains, and wondering about the middle ground, a partial exchange.

I bought the property for 180 +20k improvements – 8300 in depreciation.

The selling price is 475k. Fees are 25k approx.

The state tax rate I believe is 9.3 in California as it is taxed at ordinary income.

The fed rate is 15% I think. At any rate I come up with a cap gains tax of 63k, ouch.

What if I purchased a 250k home with a 70k loan? What would my cap gains be reduced to?

Is that a good question?

A:

It’s impossible for anyone but your personal tax advisor to give you a precise figure on your possible taxes from the proposed partial exchange because it is not a simple calculation.  There are other factors that could affect your tax, such as capital losses, suspended passive losses, and carry forward investment interest.

From your figures, you are looking at a possible taxable gain of $200,000, representing the amount you are missing the target replacement price by (450-250).  The tax on that will include a 25% Federal tax on the depreciation recapture, in addition to the 15% rate on the additional gain.

To see whether a 1031 exchange with such a huge trade-down in value makes sense, have your tax person plug your numbers into his/her tax program to run the figures for you.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Exchange Question

I have a piece of bare land (investment property) that I want to exchange for a floating home. I am being cautioned that this floating home, even if we use it for investment purposes, does not qualify for 1031 exchange because it is considered personal property and therefore not a like-to-like exchange. (This may be similar in principle to exchanging for a mobile home that is in a long-term (30 year) lease.)

The best argument we’ve heard thus far is that in California, there is a law on the books where for tax assessment purposes, floating homes are considered real property. I’m told 1031 respects state law over federal.  Further, I understand it is unlawful for a person to have to pay real property tax on personal property, therefore (sort of a “if a=b and b=c then a=c” thing) we feel we would have a good argument should we be audited.

Our title company, 1031 exchange agent and real estate agent all are comfortable with the transaction. Are we taking too much of a risk?

 

Thanks for your help!

A:

At first, I thought you were going to say that your exchange facilitator was refusing to accept the houseboat as a suitable like kind replacement property.  I agree that a permanently docked houseboat, such as you often see in places like Sausalito, which is taxed by the county as real property, would be appropriate like kind property as long as it will not be used be you personally and will be held for rental, business or investment purposes.

This is a similar situation to mobile homes.  RVs and other large living quarters that move around a lot would definitely be considered as personal property; while permanently mounted mobile homes that are taxed by the county as real property would meet that test for 1031 purposes.  

A boat that is not permanently moored, even with living facilities, would be considered personal property and not suitable replacement property for the disposal of land.

It sound like you are on the right track. 

Good luck.

Kerry Kerstetter