Capital Gains tax questions

[ladynoknowtax]

Questions on Capital gains tax

1. I bought a rental home many years ago. I am planning a 1031 exchange.
To avoid Capital gains tax, do I have to invest only the capital gains or the entire net proceeds in a 1031 exchange?


2. I have been taking depreciation allowances all these years in my Federal tax returns in Schedule E.
How does the accumulated depreciation enter the calculation of the Capital Gains wrt a 1031 exchange?


3. Anything else I should know about Net Proceeds and Capital Gains wrt 1031 exchange?

Thank you

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[Stuart Bronstein]

ladynoknowtax <avaco...@gmail.com> wrote:

> Questions on Capital gains tax
>
> 1. I bought a rental home many years ago. I am planning a 1031
> exchange. To avoid Capital gains tax, do I have to invest only the
> capital gains or the entire net proceeds in a 1031 exchange?

To avoid any tax consequences you have to buy the exchanged property
for the same price or more than you receive for the sale of your
property. To the extent that you don't, the balance will be taxed.

> 2. I have been taking depreciation allowances all these years in
> my Federal tax returns in Schedule E. How does the accumulated
> depreciation enter the calculation of the Capital Gains wrt a 1031
> exchange?

I don't do returns, so I'm not absolutely positive on this, but I
believe there will be no tax consequences, even for depreciation,
until you actually cash out. The new property will have a carry-over
basis, which reduces the amount of depreciation you can take. But
until you sell that building (or a subsequent building if you again
do a 1031 exchange), you shouldn't be taxed on the capital gain
recapture.

> 3. Anything else I should know about Net Proceeds and Capital
> Gains wrt 1031 exchange?

It has to go into an escrow account held by a third party, and you
can't either touch or even have any right to touch even $1 of that
money.

Get a good 1031 trustee/escrow company, and they will help you make
sure you keep everything legitimate.

--
Stu
http://DownToEarthLawyer.com

[lotax]

ladynoknow: Section 1031 requires an exchange of some property for some other property. It does not provide for - actually it **prohibits** - the reinvestment of the proceeds from the sale of one property by the seller into the purchase of another property.

If you are talking about, or even just thinking about, "investing the net proceeds" from the sale of your rental property, you're gonna end up where you don't want to be. You have to envision the transaction and refer to it as an exchange of property if you want to ensure that you will have any chance of being sure to qualify for Section 1031 deferral of your potential income tax liability.

Please do yourself a favor and get some "hands-on" professional help before you get your debits and credits mixed up and put some money in your account and then end up with a tax liability that you can't afford to pay because you invested your entire liquid assets in the "replacement" property!!

It has happened. Make sure it doesn't happen to you.

The absolute rule is that you are not allowed to touch, or even to just be able to touch, the proceeds from the old property. Stuart B. is giving it to you straight.