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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
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Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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Deferred capitol gains and rental property

Customer Question

This question has to do with an old deferred capitol gain of $23K on real estate. Can I continue to defer it? How do I?

I deferred 23K in capitol gains for house #1 that I owned and lived in (never rented) from 1983-1993, sales price was $109K.

I deferred that capitol gain into house #2 purchase price $145K, purchased 1993. In 1996 I converted house #2 into a rental, when I purchased house #3 jointly with spouse $190K. There were no capitol gains deferred into house #3 by myself or my spouse.

I now want to sell house #2 and take the tax hit for the capitol gains. Do I have to claim the $23K that I deferred back in 1993, or is there a way that this gain could be deferred into house#3?
Submitted: 11 years ago.
Category: Tax
Expert:  Jon Andrews replied 11 years ago.

You cannot defer that gain into house #3.


You could defer it by doing a 1031 exchange if you want to buy a different property that will be business, rental, or investment property, i.e. not personal use proeprty.


The deferred amount will by "claimed" by the fact that the adjusted basis for the property is (or at least should be) $23,000 less than you actually paid for it.


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Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience: I deal with all levels of tax planning and controversy - from the ordinary to the complex.
Jon Andrews and 2 other Tax Specialists are ready to help you
Customer: replied 11 years ago.
Reply to Jon Andrews's Post: Did you fully understand the question? The 23K deferred gain was from house#1 owner occupied for 10 years house.
Expert:  Jon Andrews replied 11 years ago.

Yes, i fully understand that. The deferral rule that allowed that original deferral is no longer in existence. The deferrral mechanism at that time allowed you to defer the gain by reducing your "cost basis" in the replacement house. When you converted it to a rental property, your cost basis for computing depreciation should have been the lower of your actual cost (after reduction for the $23,000 deferral) or its fair market value at the time of conversion.


The current mechanism is an exclusion of up to $250,000 ($500,000 if married filing joint) for a property that has been your principal residence for 2 of the last 5 years. Based on your post, this house does not qualify for that program.


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