DEAR BOB: My rental house in Scottsdale, Ariz., is worth $375,000. It cost me $57,000 in 1977. I depreciated it on a 20-year straight-line basis since I moved out in 1981. If I decide to sell this property to exchange it for a more expensive property, then I’m back in debt. Is an Internal Revenue Code 1031 exchange the only way to sell and avoid tax? – Terry S.
DEAR TERRY: Yes. If you want 100 percent tax deferral, an IRC 1031 tax-deferred exchange for another investment or business property of equal or greater price and equity is the way to go.
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If you are tired of “tenants and toilets,” an alternative is to make a tax-deferred trade into a management-free TIC (tenant in common) investment, such as a shopping center, office building or apartment building. Finding quality TICs isn’t easy, but you won’t owe any capital gain or recapture tax with such a trade.
Or, you can kick the tenant out, move into your Scottsdale house, and live there at least 24 months as your principal residence. Then its sale can qualify for up to $250,000 tax-free profits (up to $250,000 additional if your spouse also moves in and you file a joint tax return in the year of the sale).
However, the depreciation you deducted will then be taxed at the special 25 percent federal “recapture” tax rate. Also, you will probably owe state tax. For full details, please consult a tax adviser where the property is located.
IS THERE A SALES TAX ON VACANT LAND?
DEAR BOB: In a recent article, you said the maximum federal capital gain tax is 15 percent. Does this apply to any type of capital gain? Is there any sales tax on the vacant land we sold? – Lori G.
DEAR LORI: I am not aware of any state that imposes its retail sales tax on property sales. Please don’t give those government bureaucrats any ideas.
Capital gain tax refers to the tax on sales of long-term capital asset investments held over 12 months, such as stocks, bonds and real estate such as land. But state income tax rules vary widely on capital gain taxes, depending on where your vacant land is located. Please consult a tax adviser in that state.
WHERE TO GET CD-ROM ABOUT LIVING TRUSTS
DEAR BOB: In a recent article you recommended a CD-ROM about doing your own living trust. But I lost the article. Where can I obtain that CD-ROM for living trusts? – Conrad H.
DEAR CONRAD: I said there is an excellent book, “Make Your Own Living Trust, 7th Edition,” by attorney Denis Clifford, which includes a CD-ROM. Nolo Press publishes this superb book available for $39.99. It is available in stock or by special order at local bookstores, public libraries, and www.amazon.com.
NO SPECIAL TAX LAW FOR SECOND-HOME SALES
DEAR BOB: My husband and I must sell our three-level villa (our second home for 15 years, never rented). We understand our profit, minus capital improvements and real estate sales commission, carries a capital gains tax. Can you e-mail us the tax law concerning second-home sales? – Beverly J.
DEAR BEVERLY: Sorry, there is no special tax law applicable to sales of vacation or second homes. Your villa sale is a capital asset transaction, reportable on Schedule D of your federal income-tax return. For full details, please consult your tax adviser.
The brand-new Robert Bruss special report, “24 Key Questions Answered: Living Trust Secrets Reveal How to Avoid Probate Costs and Delays,” is now available for $5 sent to Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
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