Q: I co-own a property with my four siblings. It has been the residence of my family since 1958 when my parents bought it for $10,000. My parents signed over the property to the kids in 1980 and proceeded to rent it from us for $3,000 per month.
The property had a business in it and was also their primary residence. Now, we are planning to sell it. What kind of tax liabilities are we looking at if we sell it for $160,000 to $190,000?
A: The question is, why sell a $190,000 property that is giving you $36,000 in income? It sounds almost too good to be true.Wait, it’s your parents and they’re transferring wealth to you while they’re living in their home. (Nice move on their part.) Seriously, you and your three siblings have owned this property for a long time, nearly 30 years. If you’ve been depreciating the property, I’m guessing that it’s depreciated to nothing at this point.You’ll owe long-term capital gains tax of up to 15 percent on the entire sales price, plus state tax. In addition, you’ll have to recapture your depreciation and repay taxes on that amount. That is to say, you received tax benefits for having an investment property over the years and when you sell it you will have to repay those benefits. Since the property is entirely an investment property, you and your siblings could sell it and roll over the proceeds to another investment property and defer any taxes that would be owed. If your siblings don’t wish to join you in that new venture, you may be able to roll over your portion of the proceeds, and defer your tax obligation – for the moment. If you decide to do this, you’ll need to find a company that can act as a third-party intermediary for a 1031 tax-free exchange, also known as a tax-deferred exchange or even a Starker exchange.
You’ll need to identify the replacement property within 45 of the sale of the investment property you have owned and then close on the new replacement property within 180 days of selling the current investment property. These dates are strictly enforced and in some cases are shorter, so be sure you understand the dates involved and don’t miss any of the important deadlines. You’ll also need the services of a knowledgeable real estate attorney. Be sure to find one who has done plenty of tax-free exchanges, so you know he or she is aware of all the rules. For more details about the taxes you’d pay on your property, please see your tax preparer or accountant, or go to the IRS website, www.irs.gov.
February 25, 2008