Selling A Long Term Investment Property
REM #F644
By Ilyce R. Glink
Summary: A reader wonders what their tax burden will be when selling an investment property. Ilyce explains that they are selling a long-term investment and should consider doing a 1031 exchange.
Q:My brother and I purchased a house in November, 1994 for $122,000.00. Our
mother rents the house from us.
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We’ve decided to put the property on the market this fall.
What kind of tax bill can we expect to have for this house, as it is an investment
property?
A: When you sell the property, it will be classified as a long-term investment.
If you have taken depreciation, you will need to "recapture" the depreciation.
In other words, if you have depreciated the property down to $50,000, and you
and your brother sell it for $250,000, you will pay 15 percent long-term capital
gains tax on $200,000, or approximately $30,000. Your share of the tax bill,
if you own the property equally with your brother, would be $15,000.
If you and your sibling decide to invest in another investment property, you
can use a 1031 tax-free exchange, also known as a starker trust, to exchange
this investment property for another (as long as it costs at least as much as
the sales price of this property) and defer all taxes owed.
Please consult with a real estate attorney who has had plenty of experience
with 1031 tax-free exchanges, since they can be complicated and have strict
deadlines that must be met. If you miss a deadline, the exchange is forfeit.
For a discussion on the impact this sale will have on your personal tax return,
consult a CPA or your tax preparer.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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