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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10120
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I want to sell a rent house I have owned years. Buyer

Customer Question

I want to sell a rent house I have owned for 12 years. Buyer wants to give me 8k downpayment and I will carry note for 32k balance for next 10 years (seller to make monthly payments to me). Cost basis is 12k after I consider depreciation and improvements. Sale price 40k. How much is capital gain? 28k? Is arrangement considered a sale or rent to own? I know I must re-invest money in like investment to avoid cap gain tax but must I re-invest 8k or the full 28k?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.
Hi,Yes the gain is 28k ... but there are TWO different ways to handle lessening the blow from the gain(1) What's called an installment sale.(which lets you only recognize gain as you've receive it over the years)YOU can read the IRS guidance on installment sales here: http://www.irs.gov/taxtopics/tc705.html OR(2) Doing what's called a like kind exchange Where you identify a replacement property and defer all gain into that property
Expert:  Lane replied 1 year ago.
The 1031 (like-kind) exchange is a very specific process and comes with several requirements (such as using what's called a Qualified intermediary, to actually yake the proceeds from the sale of the first property and invest into the replacement property). YOu also have to identify a repolacement property within 45 days and do the buy on the second property within 180 days
Expert:  Lane replied 1 year ago.
Here's the IRS guidance on the 1031 (like-kind) exchange: http://www.irs.gov/uac/Like-Kind-Exchanges-Under-IRC-Code-Section-1031
Expert:  Lane replied 1 year ago.
Back to the installment sale for a minute ... since that's really what you already have, by default.The way the gain is recognized each year, (as you receive the payments), is as follows:The gain for each year of the installment period is calculated thus:Annual Gain=Total Gain / Contract Price × Annual Payment
Expert:  Lane replied 1 year ago.
You only recognize that prorated amount of gain and then, of course, recognize the interest income each year, as well
Expert:  Lane replied 1 year ago.
Please let me know your questions ...Lane