How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask Ed Johnson Your Own Question

Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
586644
Type Your Tax Question Here...
Ed Johnson is online now
A new question is answered every 9 seconds

Is there a way to avoid capital gains tax for both parties

Customer Question

Is there a way to avoid capital gains tax for both parties in this senario? Son sells his rental home and land, takes the profit and buys some of his dad's land.
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

Dear sez,

 

In this scenario there is no way to avoid capital gains tax. However you can arrange it to defer and reduce the tax.

 

You can do a partial 1031 (like kind exchange).

 

A like kind exchange is where you can exchange one investment type property for another of the same or similar type. so for example: you can sell a rental property and buy another using the 1031 exchange and defer taxes.

 

In your scenario, you are selling a rental property, but you are buying only some land that would presumably be held for investment. So in this instance you can only do a partial 1031 (the land of the rental property for the land held for investment).

 

When the son sells the rental home, he then buys the property from the father allocating the 1031 exchange. the father sells the property on a installment agreement. the installment agreement allows him to defer the capital gains for the life of the agreement.

 

NOTES:

 

1. For installment agreements between relatives, the seller must charge fair market rate interest of about 6%; and that interest is reported as short term gains in the year it is paid. Capital gains are taken as the monthly payments are made.

 

2. A like kind exchange has to be designated prior to the close of sale on the rental home; and you have to use a like kind exchange agent.

 

since this is a partial exchange involving the land portion only, the remaining percentage of the sale will attract capital gains tax and you will still have to pay 25% recapture tax on any accumulated depreciation on the rental property.

 

 

FYI: the father can avoid capital gains all together by not selling the land, but gifting it to the son.

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Ed Johnson and 4 other Tax Specialists are ready to help you
Expert:  Ed Johnson replied 5 years ago.

Dear Sez,

 

I see you made a deposit, but have not yet accepted. YOu are entitled to followup befor or after accepting.

 

Did you have other questions about this scenario?

Customer: replied 5 years ago.
Still unsure. Son's purchase price of rental home is $125,000. Sell price is $250,000. Dad's land price $125,000. If dad gifts the land there is no way for the son to avoid capital gains? If the dad sells the land then he only pays captial gains and not the son? So basically one party will have to pay taxes but not both? Do I have that right?
Expert:  Ed Johnson replied 5 years ago.

Dear sez,

 

That is not correct.

 

lets look at this sell.

 

do you know how much the accumulated depreciation is? if not, can you tell me how long the home has been a rental?

 

Customer: replied 5 years ago.

Rental property purchased Sept 2006 for $86k and $14k spent for renovation in 2006. Property was depreciated for that years taxes and for 2007 also. 2008 $20k more spent on improvements. Son hopes to sell property for $250k which was suggested price from realtor. Son then wants to buy 6 acres of his dad's land for $120k to build a new home to live and turn his primary residence into a rental home. In this case the son will not have to pay capital gains but the dad will, correct?

Are there any suggestions on how both parties can come out good on taxes in this situation?

Expert:  Ed Johnson replied 5 years ago.

Dear sez,

 

Thank you for your additional information.

 

I am going to give you the total tax liabiltiy (approximate) based on the information given for each scenario.

 

Fully Visible Transaction.

 

Rental Property sell:

 

PROPERTY BASIS
Value 250,000
Less Cost Basis (Purchase Price) 86,000
Less Cost Basis (Rehab Cost) 34,000
Less R.E. Brokers Fees @ 5.00%12,500
Long Term Capital Gain/Loss117,500
Accumulated Depreciation 8,598
DEFERRED TAXES
Fed. LT Capital Gains Tax @ 15.00%17,625
State Capital Gains Tax @ 6.00%7,050
Fed. Depreciation Recapture @ 25.00% 2,150
State Depreciation Recapture @ 6.00%516
Total Estimated Deferred Tax Liab. Before Adj. For Any Loss Carryforward27,341
Loss Carryforward0
Estimated Offset To Tax Liab. Due To Loss Carryforward
@ (15.00% + 6.00%)
0
Total Estimated Deferred Tax Liability27,341

 

Now the son's taxes if he does a partial exchange:

 

In doing a partial exchange, he has to apportion the cost of land to the original property. You can get this from the latested property tax record. I need to know the portion of the 86K that was land, and the portion of the 250,000 that is land.

 

ELSE I can just estimate it at 25%. Let me know

Customer: replied 5 years ago.

Rental property at purchase was house with 5 acres. House has been divided and surveyed with 0.5 acres. The land by itself is 4.5 acres. Son hopes to sell house for $150k and land for $100k. THanks for your assistance.

Expert:  Ed Johnson replied 5 years ago.

Dear sez,

 

Thank you for the additional information.

 

So now, if he does a partial 1031 exchange, his taxes on the sell of the home looks like this:

 

Value 150,000
Mortgage (First) 0
Mortgage (Second) 0
Equity150,000
RE Brokers Fees @ 5.00%7,500
Proceeds After Mort. and R.E. Fees 142,500
Total Estimated Deferred Tax Liab.14,665
Net Proceeds After Taxes 127,835
PROPERTY BASIS
Value 150,000
Less Cost Basis (Purchase Price) 57,362
Less Cost Basis (Rehab Cost) 28,000
Less R.E. Brokers Fees @ 5.00%7,500
Long Term Capital Gain/Loss57,138
Accumulated Depreciation 8,598
DEFERRED TAXES
Fed. LT Capital Gains Tax @ 15.00%8,571
State Capital Gains Tax @ 6.00%3,428
Fed. Depreciation Recapture @ 25.00% 2,150
State Depreciation Recapture @ 6.00%516
Total Estimated Deferred Tax Liab. Before Adj. For Any Loss Carryforward14,665
Loss Carryforward0
Estimated Offset To Tax Liab. Due To Loss Carryforward
@ (15.00% + 6.00%)
0
Total Estimated Deferred Tax Liability14,665

 

Now this is very tough but should give you an idea of the differences. You can see that by doing a partial 1031 exchange for the land, he only pays half the tax. An actual exchange agent will have a different figure because he or she will be able to work with you to capture all the costs and precisely apportion the cost basis and depreciation.

 

The cost basis of the land is added to the cost basis of teh property he buys from you.

 

Use this calculator to determine how much you have o to invest in your land he busy from you. Use this calculator only for the land portion.

 

http://www.1031.us/Docs/Misc/Calculator4E.pdf

 

 

JustAnswer in the News:

 
 
 
Ask-a-doc Web sites: If you've got a quick question, you can try to get an answer from sites that say they have various specialists on hand to give quick answers... Justanswer.com.
JustAnswer.com...has seen a spike since October in legal questions from readers about layoffs, unemployment and severance.
Web sites like justanswer.com/legal
...leave nothing to chance.
Traffic on JustAnswer rose 14 percent...and had nearly 400,000 page views in 30 days...inquiries related to stress, high blood pressure, drinking and heart pain jumped 33 percent.
Tory Johnson, GMA Workplace Contributor, discusses work-from-home jobs, such as JustAnswer in which verified Experts answer people’s questions.
I will tell you that...the things you have to go through to be an Expert are quite rigorous.
 
 
 

What Customers are Saying:

 
 
 
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
< Last | Next >
  • I really was impressed with the prompt response. Your expert was not only a tax expert, but a people expert!!! Her genuine and caring attitude came across in her response... T.G.W Matteson, IL
  • I WON!!! I just wanted you to know that your original answer gave me the courage and confidence to go into yesterday's audit ready to fight. Bonnie Chesnee, SC
  • Great service. Answered my complex tax question in detail and provided a lot of additional useful information for my specific situation. John Minneapolis, MN
  • Excellent information, very quick reply. The experts really take the time to address your questions, it is well worth the fee, for the peace of mind they can provide you with. Orville Hesperia, California
  • Wonderful service, prompt, efficient, and accurate. Couldn't have asked for more. I cannot thank you enough for your help. Mary C. Freshfield, Liverpool, UK
  • This expert is wonderful. They truly know what they are talking about, and they actually care about you. They really helped put my nerves at ease. Thank you so much!!!! Alex Los Angeles, CA
  • Thank you for all your help. It is nice to know that this service is here for people like myself, who need answers fast and are not sure who to consult. GP Hesperia, CA
 
 
 

Meet The Experts:

 
 
 
  • Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
< Last | Next >
  • http://ww2.justanswer.com/uploads/KU/KUMI95/2013-9-30_195031_kumar.64x64.jpg Wallstreet Esq.'s Avatar

    Wallstreet Esq.

    Tax Attorney

    Satisfied Customers:

    570
    10 years experience
  • http://ww2.justanswer.com/uploads/CU/Cuttinggirl/2011-10-29_03719_wcrop2.64x64.jpg Wendy Reed's Avatar

    Wendy Reed

    Enrolled Agent

    Satisfied Customers:

    3052
    15+ years tax preparation and tax advice.
  • http://ww2.justanswer.com/uploads/CATax/2009-08-04_204548_Mark.jpg Mark D's Avatar

    Mark D

    Enrolled Agent

    Satisfied Customers:

    985
    MBA, EA, Specializing in Business and Individual Tax Returns and Issues
  • http://ww2.justanswer.com/uploads/IN/insearchoftheanswer/2013-8-16_0233_attorney.64x64.jpg Richard's Avatar

    Richard

    Tax Attorney

    Satisfied Customers:

    3229
    29 years of experience as a tax, real estate, and business attorney.
  • http://ww2.justanswer.com/uploads/MY/MyVirtualCPA/2012-7-5_44024_cookmegan1.64x64.jpg Megan C's Avatar

    Megan C

    Certified Public Accountant (CPA)

    Satisfied Customers:

    6121
    Licensed CPA, CFE, CMA who teaches accounting courses at Master's Level
  • http://ww2.justanswer.com/uploads/JG/jgordosea/2012-6-7_43138_GordosVeritas.64x64.jpg jgordosea's Avatar

    jgordosea

    Enrolled Agent

    Satisfied Customers:

    2783
    I've prepared all types of taxes since 1987.
  • http://ww2.justanswer.com/uploads/OZ/ozaukeecpa/2012-6-7_193219_Picture1croppedandshrunk.64x64.jpg MequonCPA's Avatar

    MequonCPA

    Certified Public Accountant (CPA)

    Satisfied Customers:

    2231
    CPA, Over 30 yrs experience w/individuals and small businesses. Masters in Tax.