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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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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: 8 years ago.
Category: Tax
Expert:  Ed Johnson replied 8 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.




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 and other Tax Specialists are ready to help you
Expert:  Ed Johnson replied 8 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 8 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 8 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 8 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 8 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:


<table border="0" width="607" align="center">PROPERTY BASIS Value 250,000Less Cost Basis (Purchase Price) 86,000Less Cost Basis (Rehab Cost) 34,000Less R.E. Brokers Fees @ 5.00%12,500Long Term Capital Gain/Loss117,500Accumulated Depreciation 8,598DEFERRED TAXES Fed. LT Capital Gains Tax @ 15.00%17,625State Capital Gains Tax @ 6.00%7,050Fed. Depreciation Recapture @ 25.00% 2,150State Depreciation Recapture @ 6.00%516Total Estimated Deferred Tax Liab. Before Adj. For Any Loss Carryforward27,341Loss Carryforward0Estimated Offset To Tax Liab. Due To Loss Carryforward
@ (15.00% + 6.00%)0Total 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 8 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 8 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
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
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
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%)
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.