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I have a tax law question regarding sale of real estate in…

I have a tax...

I have a tax law question regarding sale of real estate in California, and the 1031(b) regs.

Accountant's Assistant: Because real estate law varies from place to place, can you tell me what state this is in?

California. And this is a tax law question.

Accountant's Assistant: Has any paperwork been filed?

No.

Accountant's Assistant: Anything else you want the lawyer to know before I connect you?

I am thinking of selling my rental property, which I was given by Deed of Gift by my uncle. I want to use part of the proceeds to purchase another rental, using the 1031(b) section of the IRS code. I want to know :if the cost of the new rental would be shielded from Federal and State Taxes under that section. I realize the cash portion I retain would be subject to tax, but don't know about the portion that is used to purchase new property.

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Answered in 17 minutes by:
9/8/2017
Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Tax
Satisfied Customers: 2,637
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
Verified

Hello my name is ***** ***** I am able to answer your questions concerning a 1031 property exchange.

Taxes based on the proceeds from the sale of the gifted rental property may be deferred if you use the proceeds to purchase another "Like kind" property, such as another rental property and follow the IRS property transfer guidelines.

If done properly, proceeds from the sale of the first rental property would be shielded from state and federal tax.

Who qualifies for the Section 1031 exchange?

Owners of investment and business property may qualify for a Section 1031 deferral. Individuals, C corporations, S corporations, partnerships (general or limited), limited liability companies, trusts and any other taxpaying entity may set up an exchange of business or investment properties for business or investment properties under Section 1031.

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You must report an exchange to the IRS on Form 8824, Like-Kind Exchanges and file it with your tax return for the year in which the exchange occurred.

Form 8824 asks for:

  • Descriptions of the properties exchanged

  • Dates that properties were identified and transferred

  • Any relationship between the parties to the exchange

  • Value of the like-kind and other property received

  • Gain or loss on sale of other (non-like-kind) property given up

  • Cash received or paid; liabilities relieved or assumed

  • Adjusted basis of like-kind property given up; realized gain

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If you have any further questions please let me know.

A positive 5 star rating at the conclusion of our correspondence with you is most appreciated.

Thank you!

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Customer reply replied 10 months ago
My question was a bit more involved than this - I intend to use PART of the proceeds to purchase another rental, and keep part in cash. I assume I will pay capital gains on the part I keep in cash, but what about the part I use to purchase another property? Will that portion be shielded from State and Federal tax?

You are correct, any portion of the proceeds you receive in cash will be taxable to you as capital gains.

The portion of the proceeds you use to purchase the new rental property, will receive a tax deferred treatment both federally and by the state of California.

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Was I able to answer your question clearly?

Chad EA, CDFA®, CFP®
Chad EA, CDFA®, CFP®, CERTIFIED FINANCIAL PLANNER ®, Professional
Category: Tax
Satisfied Customers: 2,637
Experience: IRS Licensed Enrolled Agent, CDFA ® CFP ®, MBA
Verified
Chad EA, CDFA®, CFP® and 87 other Tax Specialists are ready to help you
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Customer reply replied 10 months ago
thank you!

Please let me know if you do have any further questions.

Have a great day!

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