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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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In a forced sale of rental property due to eminent domain

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In a forced sale of rental property due to eminent domain? One spouse died Feb/08, property in trust - other spouse living. Forced sale completed 1/11. Time one has to reinvest (4 yrs?) to avoid capital gains tax, if any. ?? Since reavaluation done in 2/08 - this is new basis for capital gains determination??? or only 50% of it?? Does taking it as a 1035 exchange comprimise time one has to reinvest? thank you - prudent

LEV :

Hi and welcome to Just Answer!

LEV :

Here is the code section you are looking:


http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001033----000-.html


The period referred to in subparagraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending—


(i) 2 years after the close of the first taxable year in which any part of the gain upon the conversion is realized, or


(ii) subject to such terms and conditions as may be specified by the Secretary, at the close of such later date as the Secretary may designate on application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary may by regulations prescribe.


Some advantages of the 1033 Exchange in comparisson with the section 1031 like-kind exchange. It does not require the use of a qualified intermediary – so you can keep proceeds of the sale while the 1031 Exchanges require the funds be placed with a QI. Also can complete the exchange by making improvements in already owned property while the 1031 exchange requires purchasing a new property.

LEV :

The basis for capital gain determination for inherited property will be its fair market value at the time the spouse dies. Because California is a community property state - the whole property will have stepped up basis (not 50%).

Customer:

Thank You for your answser - after reading your response & what I have researched - I am still a bit confused as to what date the clock begins for replacement property to avoid any possible capital gains, as on one hand it is stated when seller realizes gain but on another when the threat of imminence is delivered, and it is the earllier of such??? Which is it? Thank You - Prudent

LEV :

According to the statute - the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier.

Customer:

So in your opinion is this when first letter of intent of developing agency, when actual suit is filed or when, monies are realized?

LEV :

For your situation - the law gives you a choice to start the period from the date when the title was transferred (the date of the disposition) or from the date the first letter of intent was received (the threat or imminence of requisition or condemnation)


If the property is condemned – you may replace the condemned property before the date on which the title was transferred.

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