DEAR BOB: What would be the process to trade two homes forone? The two homes are valued at $1.5 million total. The home for sale is valuedat $1.2 million. The seller will trade. What is the first step to take?–Phyllis S.
DEAR PHYLLIS: If I understand your question correctly, youwant to trade two rental houses worth a total of $1.5 million for one rentalhouse worth $1.2 million. That would be a partially taxable trade down becausethe two rental houses are worth $300,000 more than the one rental house beingacquired.
Purchase Bob Bruss reports online.
This could get a bit complicated because there is the 25percent depreciation recapture tax to consider in such a down trade.
If the owner of the $1.2 million rental house is willing totake your two rental houses and pay you the $300,000 cash difference, thatwould be the easiest way to go.
However, if he is not willing to pay you $300,000 cash, youshould then consider selling the two rental houses in a Starker delayedtax-deferred exchange using Internal Revenue Code 1031(a)(3).
That means you sell your two rental houses for cash, havethe sales proceeds held by a qualified third-party intermediary accommodatorbeyond your constructive receipt, and then within 45 days after the first salecloses designate the property to be acquired. You then have up to 180 days tocomplete the acquisition.
After the purchase is completed, then you will receive the$300,000 cash “boot,” which is taxable to you. For details, pleaseconsult a tax adviser experienced with IRC 1031 tax-deferred exchanges.
IS RENTAL CAPITAL GAIN TAX 15 PERCENT OR 40 PERCENT?
DEAR BOB: I have owned a rental property for a year. If Isell it in the next few months, what is the capital gains tax I will pay? Iread an answer you gave someone that the government wants a 25 percent tax backon the depreciation. Does that mean the government gets a total tax of 40percent? –Steve B.
DEAR STEVE: No. If you owned your rental property at least365 days, you qualify for the federal long-term capital gain tax rate, which isa maximum of 15 percent.
However, a portion of your capital gain that is due to thedepreciation you have deducted will be “recaptured” (that means taxed)at the special federal depreciation recapture tax rate of 25 percent (insteadof 15 percent tax on the balance of your capital gain).
In addition, don’t forget the state tax, unless the propertyis located in one of the lucky states without income tax. For full details,please consult your tax adviser.
DOES STEPPED-UP BASIS APPLY TO LIVING-TRUST ASSETS?
DEAR BOB: I understand the rule for stepped-up basis tomarket value on the date of death for inherited property. Does that same ruleapply to my house that is held in my living trust? –Andrew G.
DEAR ANDREW: Yes. Holding title to your house and othermajor assets in your revocable living trust does not deprive your heirs of thebenefits of stepped-up basis on inherited property. They will thank you for leavingyour assets to them via your living trust, thereby avoiding probate court costsand delays.
But they will still get the same stepped-up basis to marketvalue on the date of your death as if your property went through probate. Moredetails are in my special report, “24 Key Questions Answered: Living TrustSecrets Reveal How to Avoid Probate Costs and Delays,” available for $5from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at1-800-736-1736 or instant Internet delivery at
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News