DEAR BOB: I inherited land that has a cost basis of about $100,000. It was recently sold for $400,000. I am looking to buy a rental beach condo for $250,000. Can I delay reporting the capital gain on $250,000 as a tax-deferred exchange? – Charles S.
DEAR CHARLES: If you already closed the sale of your land, without having the sales proceeds held by a qualified third-party accommodator-intermediary beyond your constructive receipt, you can’t qualify for an Internal Revenue Code 1031 tax-deferred exchange.
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However, if the land sale has not yet closed, then you can arrange for an IRC 1031 tax-deferred exchange if the beach condo will be a rental property. If it is to be your personal residence or a vacation home, then it can’t qualify for a tax-deferred exchange.
However, since you will be “trading down” from a $400,000 investment property to a $250,000 investment property, the $150,000 difference will be taxable as a capital gain. For details, please consult your tax adviser.
WILL A LIMITED LIABILITY COMPANY (LLC) AVOID LAWSUITS?
DEAR BOB: My brother, sister and I own four rental properties. Two of the properties are insured. But two vacant buildings are not insured. We now hold titles in a partnership. Would we be more protected from lawsuits by holding title in an LLC (limited liability company)? – Carol O’B.
DEAR CAROL: Forming an LLC to hold title to the properties might be desirable in your very dangerous, uninsured situation. By all means, I suggest you obtain liability insurance on those two vacant uninsured buildings.
If you hold title to your properties in an LLC, you get sued, and a big judgment is rendered against you, the judgment creditor might be able to “pierce the corporate veil” of the LLC. The law on relatively new LLCs is still evolving. For more details, please consult a local real estate attorney.
IRREVOCABLE TRUST IS FAR DIFFERENT THAN A LIVING TRUST
DEAR BOB: I read in the newspaper about the problems of having your principal residence title held in an irrevocable trust regarding Internal Revenue Code 121. Is the same true for a revocable living trust? – Harold S.
DEAR HAROLD: No. Comparing an irrevocable trust with a living trust is like comparing apples and oranges. They are completely different.
A revocable living trust is a method of holding title to real estate. The two primary purposes are to (a) avoid probate costs and delays after the owner’s death, and (b) manage the property if the owner becomes incapacitated, such as by a severe stroke or Alzheimer’s disease.
However, property titles held in an irrevocable trust are completely different. They are not eligible for the principal residence sale Internal Revenue Code 121 tax benefit of the $250,000 exemption (up to $500,000 for a qualified married couple filing a joint tax return in the year of sale). For full details, please consult your tax adviser.
The 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 from 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.
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