Melissa owns a residential lot in Spring Creek that has appreciated substantially in value. She holds the lot for investment. She is considering exchanging the lot with her father for a residential lot in McComb that she also will hold for investment. Identify the relevant tax issues for Melissa.
2006-12-15 13:03:49 · 5 answers · asked by cntrybmpkn_95 2 in Business & Finance ➔ Taxes ➔ Other - Taxes
If you make a simultaneous exchange of one property for the other with cash paid or received and if there is no reduction of debt in connection with the exchange, it would be a tax-free exchange.
If there is not a simultaneous exchange:
from http://wwwtaxman.blogspot.com :
Situation: You want to sell your property, look for a replacement property of a higher value, find a seller later and treat it as a tax-free exchange:
You could sell your property for $150k, park the proceeds with an intermediary, add $50k cash to buy a $200,000 property, identify and close within the alotted time and qualify for a tax-free Section 1031 Exchange if you use a qualified intermediary.To make a tax-free exchange you can assign your sales contract to the intermediary, trade the property to the intermediary with an additional 50K, let the intermediary sell for 150K, instruct the intermediary to purchase the 200K property, and receive the replacement property from the intermediary to complete the trade. If done within the allotted time, that would qualify.
A qualified intermediary is the best way to go (according to the rules to avoid a taxable transaction) unless it is truly an exchange between only 2 parties.
There is NO Income tax if
[1]No cash is taken out of the exchange
[2]There is no net reduction to debt.
References: Publication 544 and Form 8824 http://www.irs.gov/formspubs/index.html
2006-12-16 07:25:59 · answer #1 · answered by Anonymous · 0⤊ 0⤋
The exchange under section 1031 is relatively straight forward. If the lots are of equal value there is no current tax and your basis in the lot you own because the basis in the lot you receive. If the lots are not of equal value then one person would receive cash which would be taxable. If the value is not equal and cash is not exchanged then one party is making a gift to the other and a gift tax may apply.
Because you are related the transaction could be subject to greater scrutiny than a transaction between unrelated parties.. You will need to take extra care in establishing the value of each property.
2006-12-16 04:26:53 · answer #2 · answered by waggy_33 6 · 0⤊ 0⤋
Internal Revenue Code sec. 1031. Just Google it, and find a "qualified intermediary" to handle the tax-free exchange.
2006-12-15 22:34:03 · answer #3 · answered by Anonymous · 5⤊ 0⤋
This falls under like-kind exchanges (two similar properties). She can claim sec. 1031.
2006-12-15 23:19:12 · answer #4 · answered by KillerKat 3 · 0⤊ 0⤋
like kind exchange
are the lots of equal value and how is this detemined must consider basis of each lot
2006-12-15 21:17:41 · answer #5 · answered by Anonymous · 0⤊ 0⤋