Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for July 9th, 2007

Is a 1031 exchange needed?

Posted by taxguru on July 9, 2007

Q:

My parents are both deceased and I am presently under contract to sell the farm.  I have made my intention to perform a 1031 exchange known to the potential purchaser.
 
I would like for you to advise me on the best course of action involving this matter.  My desire is to reinvest the  portion of the sale which would be subject to capital gains tax.
 
As a brief history; the farm was purchased in 1995, my mother died in May 2002, my father in  November 2003.
I have always lived here since 1995. 
 
I don’t know how to establish  the new value basis for the farm or how the exemption on the sale of my primary residence  will affect my overall tax liability.
 
The purchase price will be substantially more than average requiring, I believe, an exchange to avoid capital gains tax.
 
As it stands now the closing date could be anywhere from September  of this year to February of next year.  An investment group is purchasing the farm and other adjacent properties for a commercial venture and there are certain contingencies which make it impossible to know the exact closing date. 
 
So I  basically need to know where I stand so I will be prepared if the sale concludes as expected. 

Sincerely:

 

A:

It’s critical that you consult with a professional tax advisor because there are a number of issues that need to be considered.

First is the determination of your cost basis in the property in order to determine how much potential profit you would be looking at with a sale.  This depends on how you acquired legal title to the property, which wasn’t clear in your email. The three most common ways to acquire title would be by purchase, gift or inheritance.  Each one gives a very different cost basis amount.

For example, if you purchased it from them while they were alive, that would be your cost, plus improvements and less depreciation.

On the other hand, if they gifted the property to you while they were alive, their cost basis carries over to you even though Gift Tax returns are based on the property’s fair market value at the time of the gift.  If you received the property as a gift, you would start with their adjusted cost basis and add in any capital improvements and subtract any depreciation you have claimed to arrive at your current cost basis.

Finally. if the title to the property was transferred to you as a result of your parents’ death, your cost basis in it would be its fair market value as of the date they passed away, or an alternative date (usually six months later) if that was used on their estate tax return. 

If you did inherit the property, with the cost basis being established based on its value in 2003, your potential gain shouldn’t be as high as it would be if you had purchased the property or received it as a gift.

The other big issue that you need to work on with a professional tax advisor is how much of the property qualifies as your primary residence so that the sale price can be properly allocated between it and the farm portion.  As you probably know, up to $250,000 of gain from the sale of a primary residence is tax free; $500,000 if you are married.  I have a full explanation of this extremely useful tax break on my website.

I hope these points are useful in deciding if you have a tax problem to worry about, in which case a 1031 exchange would be a wise move.

Kerry Kerstetter
 

 

 

 

Posted in 1031 | Comments Off on Is a 1031 exchange needed?

LifeTime Gift Tax Exclusion

Posted by taxguru on July 9, 2007

Q:

Subject: gift tax question

My mother will be selling property soon that I was supposed to inherit upon her death. I am supposed to receive the proceeds, but instead of her gifting me the property, I have been advised that she should sell the property in her name to pay lower capital gains rates and alternative minimum taxes than I would since my annual income is much higher and gift the after capital gains tax proceeds to me.

 

I was told that she could give a one time gift of up to $1,000,000 exempt from gift tax but subtracted from her eventual estate. In other words, for 2007 the gift of $1,000,000 would reduce her exempt estate taxes to $1,000,000 from the $2,000,000 current limit. I have been assured by my CPA that is the case, but I can find nothing online including IRS.gov that mentions anything other than a $12,000 annual exemption from gift taxes.

 

This deal is based on my ability to receive the after tax proceeds (approx. $850K) without any gift taxes being paid by my mother in addition to the capital gains taxes. If both capital gains taxes and gift taxes applied to these funds the government would end up with more of the proceeds than we would. I appreciate any advice you can share.

A:

You need to check IRS Publication 950.  It explicitly mentions the lifetime exclusion of $1,000,000.

Here is a link to that part on the web.

To see the entire Pub. 950:

Web-Friendly HTML

Downloadable PDF

Good luck.

Kerry Kerstetter

 

 

TaxCoach Software: Are you giving your clients what they really want?

Posted in Gifting | Comments Off on LifeTime Gift Tax Exclusion

No Change In SUV Section 179 Limits

Posted by taxguru on July 9, 2007

Q:

Subject: section 179 for SUV

In 2007 do you know if you can still expense $25000 of a vehicle with GVW over 6000 pounds under the Small Business and Work Opportunity Tax Act of 2007?  Thanks 

 

A:

That rule has not been changed. 

The only change in the new tax law is to raise the overall maximum Section 179 from $112,000 to $125,000 for 2007.  The special $25,000 limit on SUVs was not modified.

Kerry Kerstetter

 

Follow-Up:

Thank you

 

Business Plan Pro

 

 

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There are never enough types of taxes to satisfy the DemonRats…

Posted by taxguru on July 9, 2007

X-rated trade targeted by Calif. tax measure

Posted in Commies, taxes | Comments Off on There are never enough types of taxes to satisfy the DemonRats…