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Anne
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I purchased at a minimum cost land from my sister, that has

Customer Question

I purchased at a minimum cost land from my sister, that has been in our family for generations in 1992. It is 54 acres. I am now selling it to my sister since I realize that I am not going to ever be moving to that state from where I live now. I am also going through a divorce, but the land is considered premarital because I didn't marry until 1993. My question: I need to avoid any tax liability from capital gains. Is that possible? Do I have to put that money into another property, which is what I want to do. What are the capital gains laws, as they would apply to me? I would be also receiving about $80,000 from the marital home if my ex. can afford to buy me out. Is there a tax liability there?
Submitted: 5 years ago.
Category: Tax
Expert:  Anne replied 5 years ago.

HiCustomer/p>

 

Thank you for using justanswer. You've actually asked a few different questions here, so let's take them one a time.

 

Since IRS really has no way to know who is actually entitled to claim the children on their tax retun, they will honor the claim they receive first. However, this does NOT stop you from also filing for the children. (you will have to mail the tax return instead of elelctronically filing it however) If you have already filed your return, you may amend it by filing Form 1040X .

 

Unless there is something in your divorce decree that states your ex may claim the children on alternate years, then the custodial parent is the person enetitled to claim the children and all of the tax credits associated with them, such as the Child Tax Credit or the Earned Income Credit if applicable.

 

Once you send in a return claiming the children, the IRS will notify both you and your ex that more than 1 person claimed the same children, and would 1 of your like to amend and remove the children as dependents. If neither of you does, then the IRS will send out a packet of information designed to gather information to see who is really entitled to claim the children. The packet will contain such things as whose name is XXXXX XXXXX school records as being the custodial parent, what neighborhood do the children attend school in, who gets notified if there's an accident, who goes to parent/teacher conferences, who takes them to the doctor,, etc. If you are receiving any aid from the state, such as food stamps or medicaid for exemple, that would be an excellent proof of where the child's main home is.

 

If it is determined that you were in fact entitled to claim the children, then your claim will be honored, and your ex will have to pay back any money he was paid for associated with claiming the children. Please see below for more in depth information:

 

Publication 501 (2008), Exemptions, Standard Deduction, and Filing Information

 

As for the land you purchased from your sister, and are now selling back to her, the capital gains tax law no longer allow you to "defer" or postpone paying the tax just because you reinvest it. I'm assuming you owned the land for more than a year, which makes the profit on the sale eligible for the lower capital gains tax rate (15%).

 

Tax Facts About Capital Gains and Losses

 

Finally when it comes to your family home, since in effect your ex is buying you out, there should be no tax consequences as long as your owned and lived in the home at least 2 out of the last 5 years. Again, please see below:

 

Publication 523 (2008), Selling Your Home

 

Excluding the Gain

 

I hope this helps.

 

 

Customer: replied 5 years ago.

I am asking about putting the money from the land in PA. to a like-kind exchange of a house that I would rent to a friend. Can I do that and not pay capital gains? Also, anything else I should know?

Thanks,

Anita

Expert:  Anne replied 5 years ago.

Hi again

 

Yes, its possible for you to enter into a 1031 exchange which would defer the tax on the property, but there are some pretty strict rules you need to follow.

 

First, in order for a sale to qualify for a 1031 like kind exchange, there are some specific rules/guidelines that must be followed. The 1031 exchange rules lay down a guideline for the proceeds of the sale. The proceeds from the sale must go through the hands of a "qualified intermediary" (QI) and not through your hands or the hands of one of your agents or else all the proceeds will become taxable. The entire cash or monetary proceeds from the original sale has to be reinvested towards acquiring the new real estate property. Any cash proceeds retained from the sale are taxable.

 

 

The second fundamental rule is that the 1031 exchange requires that the replacement property must be subject to an equal or greater level of debt than the property sold or as a result the buyer will be forced to pay the tax on the amount of decrease. If not he/she will have to put in additional cash to offset the low debt amount on the newly acquired property

 

There are also some strict time limits involved (180 days from the time of the sale of 1 property to acquiring the other property)

 

Additionally, if you enter into a related party 1031 exchange and one of you sells the property acquired in this exchange within the first 2 years, you may lose the non tax recoginition of the 1031 status.

 

Please see below:

 

1031 Exchange | Asset Preservation, Inc. | 1031 Tax Deferred Exchange ...

 

Related Party 1031 Exchanges: Caution Needed in These Transactions

 

I hope this helps.

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Anne
Anne
Master Tax Preparer
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Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses