Paying capital gains tax

[CIN]

I am in the process of purchasing a house to repair and immediately sell. Are there any ways to avoid capital gains tax? I will not live in the house and hopefully it will be sold within 2 months after purchase. Any help please.

[Chap]

You might be able to do a 1031 exchange. But all proceeds have to go into another property. This may help http://apiexchange.com/index_main.php?id=8&idz=2

[Aldo]

Under current law you must hold a property for one year and one day to qualify for a 1031 exchange. If you plan to sell in a few months, there is little you can do to avoid capital gains tax.

[B&B Investments]

could you not do something with it within the LLC guidelines as something or use it as a business expense or anything like that.
or makinbg it part of a trust thing.


just a thought i may be thinking wrong.

Racy :SM135:

[elnuk]

Hi Cin,

I am not sure if this is legal, and i hope others on this forum who are more experienced can chime in here...

You can take out an equity loan on the subject property to reduce you equity position. This way when you get to sell? you will be paying back the loan and thereby reduce you profit on paper and subsequently your capital gains tax.

[Maddog56]

The amount of the mortgage on a property hasn't got anything to do with the profit realized for taxes. Sale price - costs (capital improvements, advertising, real estate commission, etc.) - purchase price = gain, taxed at short or long term rate depending. If you rent it, you get to take depreciation and then pay taxes on depreciation recapture at 25%. While you hold the property, you can deduct interest, insurance, other costs associated with the property (assuming it is an investment property, not your residence).

[Jim Johnson]

I love paying capital gains tax because it sure beats the income tax I pay. When you do the analysis on a property figure in the tax from the beginning. It is a cost of doing business. The legal process of not paying tax on a sale only defers the tax to a later date. In a audit they will very carefully look at the number of days you have held a property if you are doing a 1031x. I know of people that try to skirt the law doing the exchange in different years, but I know they do not sleep well at night and cringe whenever a IRS form hits their door. I say, suck it up and be GLAD you have tax to pay!

I am in the process of purchasing a house to repair and immediately sell. Are there any ways to avoid capital gains tax? I will not live in the house and hopefully it will be sold within 2 months after purchase. Any help please.

[Maddog56]

Amen. 'nuff said.

[wexeter]

I just wanted to chime in here to correct a prior comment. The comment was made that under current law you must hold the property for 12 months and one day. The law (tax code) and the regulations do not specify any requirement, which explains the amount of confusion in this area. The regulations do require that the investor have the INTENT to HOLD the property as rental, investment or use in a business. The issue is how do you prove that you had the INTENT to HOLD the propery for rental, investment or use in your business when you are audited by either a federal or state entity? The best way to prove your INTENT to HOLD is to do just that - hold the property for rental, investment or use in your business. Most tax advisors recommend a 12 month holding period for a couple of reasons: (1) Congress was considering a 12 month holding requirement over a decade ago, so it gives us a good idea of what the legislative intent was; (2) a 12 month holding period will straddle two tax years with two tax returns showing rental income, expenses and depreciation, so it makes it very easy to prove your intent to hold; and, (3) 12 months is the magical cut off date between ordinary income taxes and capital gain taxes. If you hold the property for less than one year it does not mean that it will automatically be disallowed, but it does mean that it will be more difficult to prove your intent to hold as the holding period gets shorter. Certain scenarios such as buying to fix up and then sell (flipping) or buying apartments to convert to condos and then to sell are perfect examples of one's intent to hold for sale and not hold for investment and therefore will not technically qualify for 1031 exchange treatment.

[Makeabuck]

I am in the process of purchasing a house to repair and immediately sell. Are there any ways to avoid capital gains tax? I will not live in the house and hopefully it will be sold within 2 months after purchase. Any help please.


As I understand it this comes under the heading of regular income, so CGT

is not the issue. Regular income tax is. If I am wrong someone please

explain the reason why CGT applies.

[Jim Johnson]

If you buy something for $100,000, and sell it for $200,000 you will realize a 'capital gain' of $100,000 less expenses to sell the item. The difference between the basis and sold price is a gain that is taxed based on short term or long term capital gain rates, 15 or 20%. Ordinary income is something you would pay yourself, pay unemployment and fica taxes on. If your taking a paycheck, you look at that amount as income, a lump sum payout based on something going up in value is a 'capital gain'.

As I understand it this comes under the heading of regular income, so CGT

is not the issue. Regular income tax is. If I am wrong someone please

explain the reason why CGT applies.

[Makeabuck]

[Ordinary income is something you would pay yourself, pay unemployment and fica taxes on. If your taking a paycheck, you look at that amount as income, a lump sum payout based on something going up in value is a 'capital gain'



True: But if you purchase a house with the intent of repair and resale immediatly, the house becomes stock in trade not a capital asset. The IRS on audit can determine that this was business activity and not the realisation of a capital gain. They certainly would if more than one occured in one year.


This was how it was explained to me.

However if you bought with the intent to rent out and then changed your mind this is a different story and CGT applies.