Can You help me with a really hard tax question?

Question

My uncle Charlie bought an abandoned house in Chicago 25 years ago for $10,000.
Last year he sold it to a developer for $300,000, it will be torn down and turned into a condo complex.
He is a factory worker and would rather keep the money than put it into another house which he might not be able to afford long term.
He owns another house which is his primary residence.
What are some deductions that he can use so he won't end up giving half his money away?

Answer 1

Here's the deal: in order for a home to qualify as a primary residence the taxpayer must have lived in the home for any 2 out of the last 5 years. Judging from your question, your Uncle Charlie does not currently live in the house that was sold. However, if he has lived in the house for any 2 of the last 5 years then as a single taxpayer he could exclude $250,000 of capital gains and if MFJ then he could exclude $500,000 of capital gains.

Assuming that he does not meet the criteria for the primary residence capital gains exclusion then he will be faced with capital gains of 15% on the sale price of $300,000 minus his adjusted cost basis (initial basis of $10,000 plus repairs, improvements, etc.)

Also, depending on how the property was used and if he took any depreciation in prior years then he may be subject to depreciation recapture at a rate of 25%.

Either way, if he is not absolutely dead set against owning another property then he has 60 days to find another property and 180 days to settle the new transaction in order to qualify for a 1035 exchange and defer the capitals gains.

Answer 2

Well, first of all, he won't be giving half his money away. He'll only be giving a portion of it, definitely less than 50%. There are many aspects to this situation and many unknown quantities. For example, was this a rental property or strictly an investment? Did he make any improvements to it? Did he ever depreciate the property? These questions are very important to determining what his tax liability will be. Very generally, there's something called his "basis" in the property which means what he paid for it together with any improvements he may have made plus certain costs he paid to obtain the property. He would use these figures against the selling price to determine his gain and thus his tax liability. There are also certain costs he may have incurred in selling the property that are deductible. The best thing to do is consult a tax professional with experience specifically in real estate sales. Someone who knows his stuff will be able to get the best tax break for your uncle. Good luck.

Answer 3

He won't be paying half of his gain in taxes, but he will be paying at least 15% of his gain to federal taxes, plus he will pay state taxes.

What use did he make of this house? If it just sat empty until he sold it, then it is an investment and he has $290,000 of capital gains, taxed at 15%. Not close to half, although he will also have state tax to pay on the gain as well.

If he used the property as a rental, then it is more complicated. He needs to have the basis of the property figured, adding things like improvements and assessments to the initial cost, and subtracting expenses like depreciation. The difference of the basis and $10,000 is taxable gain. Some of the gain is taxed at 15%, some at a higher rate. For this amount of gain, he needs to have a professional figure it. The transaction costs of the sale will also reduce tax on the gain.

Reinvesting in a personal residence will not have an effect on taxation of the gain.

Answer 4

he should report this on his tax return as a capital gain. the cost will be the original $10,000 plus any capital improvements he has made over the years, less any ALLOWED depreciation on the building (whether he actually took it or not.) the proceeds will be the amount he received when he sold it. the difference will be a capital gain. whether he invests in more real estate or not is irrelevant, because this was not a primary residence nor i assume a vacation home.

Answer 5

well interesting question. He can take off everything he has invested into the home in the past few years such things as electrical funace etc anything that would improve the home itself but unfortunately there is still a lot of capital gains there which is taxable, I would go to your nearest taxation office and enquire as to what deductions they would allow and what they want.

Answer 6

My recommendation is to invest as much as is possible. First of all would be RSP's, you can put a lot of it into them and that will protect it until he retires. Another choice would be to purchase land or property. You are going to pay taxes, but the more you can put it into sheltered deductions, the more you can keep. Secondly, spend a little of the money on a good accountant or investment counsellor. get their advice and follow it.

Answer 7

If the house he sold just happend to be his primary residence for the past 2 years (wink!, wink!) he can avoid paying capital gains taxes on up to $250,000. Hope this helps...

I dunno why people are marking this answer as bad. This could save him a lot of money.