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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28275
Experience:  Taxes, Immigration, Labor Relations
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My ex owns a house he inherited in 1994 for $650,000. In

Customer Question

My ex owns a house he inherited in 1994 for $650,000. In california. He wants to sell it now for $5.3 million & do 1031 exchange for several properties & eventually give them to our 2 kids. He owes me 300,000 & I have a lein on the property. He has 400,000. Mortgage. He currently gets $8800. Rent but in the area $11,000. To $15,000. Is normal for like property. He also wants to take at least 100,000. Cash from sale. His boot would be approx 1 million on a 5 mil sale. He also would be buying a residence for himself. His current prop tax is $2000. Does an exchange make sense?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Hi and welcome to our site!

Several issues.

As the property was inherited - it has so -called "stepped up basis" equals to the fair market value (FMV) of that property at the time the decedent passed away.

So if the decedent passed away in 1994 and the FMV of the property was $650k at that time - that value would be the basis.

In additional - the rental property was depreciated. So we need to apportion that basis between the land - that is not depreciable, and the building. Residential rental is depreciated over 27.5 years. So most of the value is already depreciated.

That actually means - if sold for 5.3 million - the taxable gain will likely be ~$5 million.

He may purchase another rental property and defer (not avoid!) that gain under section 1031 - that is a good plan.

As he plan to defer $4 million and recognize $1 million - that amount will be included into his taxable income.

Let me know if you need help to estimate possible tax liability.