Anyone know ... tax question re: selling property

Discussion in 'Homesteading Questions' started by agmantoo, Oct 31, 2005.

  1. agmantoo

    agmantoo agmantoo Supporter

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    To get the tax break you must either sell your home or do a 1031 exchange. The exchange is the way to go if you are wanting to have a large homestead. On the monies that you do not spend in the 1031 you will be obligated to pay capital gains. Capital gains aren't really all that bad if you want to get out of debt. The federal portion of on capital gains will be 15 %. In some state you will also have a state obligation. I really like the 1031 setup. It has enabled me to greatly increase my holdings. Sell the lot on the 1031 exchange, then sell the home. Otherwise sell the entire property as your home and run with the money taxfree. Be certain that you acquaint yourself with the rules regarding the 1031 so that you do not get disqualified.
     
  2. norris

    norris Well-Known Member

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    1031 exchanges are only for investment property, and cannot apply to anything used as a personal residence.
    The 250K exemtion is only for personal residences, not land.
    If you have been living in a house on the 2.4 acres at least 2 years you could sell it in it's entirety and get the 250K exemption. Also, I think that if you sell your personal residence and retain a portion of the land you may be able to use the exemption.

    If the 2.4 acres is an investment property, you can sell it and do a 1031 exchange for another investment property, but if you decide to move into the new investment property you might be skating on thin ice...the issue being "intent".

    My advice, if you own property in a "hot market", squeeze as much out of it as you can, pay the taxes on it and buy a homestead somewhere. Long term capitol gains tax is only 15% now, so even if you had high income this year it won't throw you in a higher tax bracket.

    I am not a CPA. You can consult one when you have figured out what questions to ask. Good luck.
     

  3. agmantoo

    agmantoo agmantoo Supporter

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    A 1031 is a like kind exchange. I sell farm land and I buy tree growing land. These are like kind exchanges in that both produce a crop.
     
  4. norris

    norris Well-Known Member

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    True, but 1031 exchanges do not apply to personal residences. Unless they make some kind of special exemption for residences on working farms/ranches, but I have never heard of it. I have done several 1031 exchanges. They are a real pain in the neck because you really have to dot your I's and cross your T's. The only thing they are good for is to enable an investor to re-invest a larger sum of money in the next venture.
     
  5. agmantoo

    agmantoo agmantoo Supporter

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    Norris, I suggested that the lot be sold and then a 1031 done with that money to buy acreage. The house and its lot can be sold separate and a different house can be had on a portion of the acreage that is outside the 1031 exchange. If the lot was used/held to generate income then it will work.
     
  6. norris

    norris Well-Known Member

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    agmantoo, That's agood idea but a complicated one.
    IF...the 2.4 acres Cygnet owns was a personal residence for over 2 years and IF... it can be split, Cygnet could buy a parcel of land in 2 portions (IF it can be split) and make the residence separate from the investment portion it could be done. Finding out if a parcel can be split is something that is sometimes very difficult to get a definite answer on. But, yes, the 1031 could apply to the investment land and the 250K exemption to the residence.
     
  7. agmantoo

    agmantoo agmantoo Supporter

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    Norris, I have done what we discussed. You need competent people working on the task but if the circumstances you stated are met then it could be a go and a good one at that! The split (bulk of the land and house and land under the house) could be on paper only and the sell in two different transactions.
     
  8. MaryNY

    MaryNY Well-Known Member

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    You probably need to visit either a CPA who is also an attorney, or a tax attorney -- you could probably get just a consultation for a reasonable fee and get pointed in the right direction and advised of what pitfalls to watch out for.

    Personally I'd sell the whole kit and kaboodle for every penny you can squeeze out of it using whatever tax maneuvers you can figure out, and the head for the hills. Good luck!

    MaryNY
     
  9. froggirl

    froggirl Feelin' Froggy

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    You have to own and live in a house for 2 years (730 days)sometime in the past 5 years in order to qualify for the $250,000 exemptions against your capital gains. If you go to www.irs.gov and type in "capital gains" in the search box, they actually have some really simple explanations for these types of questions. We were in the same boat...our house value went up so fast, it was incredible. We just met the 2 year requirement today so hopefully it sells fast. :clap:
    The problem you run into with a 1031 exchange is that it does have to be an investment and each time you sell the investment you originally used you have to reinvest it. My parents ran into that and finally just paid the 15% tax to get their money out of the original investment.
    Good luck!
    --f.g.
     
  10. rambler

    rambler Well-Known Member Supporter

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    That 1031 deal is ruining many farm families. Little fellows can't compete in their own home turf with the folks coming out of the metro area & throwing huge sums of money at farm land, because they think they must reinvest. It is destroying farm ecconomies.

    Note that if I were faced with the situation, I would use the 1031 deal myself. Not against anyone using the tools that are available.

    However, for the long term good of agriculture/ rural areas, there should be some sort of limit on the 1031, such as you can olny buy as many acres as you sell, anything over gets taxed. That would offer some shelter, but not ream outlying farm neighborhoods as is happening now.

    --->Paul
     
  11. apirlawz

    apirlawz playing in the dirt

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    Ok...Hubby is a tax CPA, and I'm transcribing for him....

    First, some questions for Cygnet:

    1) Have you included some or all of the cost of the land as part of the conduct of a business?

    This is probably not likely unless you've formed a partnership or corporation for your business, but if you did, then the IRS could look at that portion of the land as being an "ordinary" asset that would be taxed at regular income tax rates. (ie, 15, 25, 35% whatever bracket your current income places you in.)

    If your land is not in a business, then the previous comments about possible gains being taxed at the 15% capital gains rate is correct.

    2) Have you depreciated the cost of your home through rental or business use?

    Any gain due to depreciation after May 6th, 1997 would not be covered and you would have to pay tax on that amount of the gain.


    Assuming that the answers to the above questions are "no":

    Without the sale of the residence, I don't think it's possible to take the exclusion for just the land. I'd set aside 15% of the profit for capital gains tax. I'd also check if your state recognizes the exclusion as well.

    Regarding the use of 1031 exchange:

    1) 1031 exchange rules apply to business or investment property. (Basically, any gain from the trade of business/investment property is deferred until the newly aquired property is sold.) Thus, this appears to exclude using that provision to exclude the gain on the sale of a personal residence. In other words, the 1031 doesn't apply here.

    It may be possible to split off a portion of the land to make it investment property, and thus eligible for 1031 exchange treatment. However, definitely seek professional counsel to research the mechanics of this process before going further!

    2) The exchange of a personal residence is treated as a sale for the purposes of the $250K ($500K if married and meeting certain conditions) home sale exclusion. This means that your gain on selling or trading your house is automatically recognized as income, but the exclusion will allow you to not be taxed on the first $250K/$500K you make from the sale. This reinforces that the 1031 rules do not apply to a home sale.


    This is April again.... Hubby was referring to the 2005 Fed. Tax Handbook while answering the original question and looking at the 1031 exchange issue. He didn't want to comment too extensively about the factors involved in using 1031 simply because he felt he'd need to do quite a bit more research on the subject than he was willing to do while the Steelers are playing. :nerd:

    Sooooo, if you have any questions/ comments/ heckles, I'm afraid I'll not be able to get a response to you right away, it will have to wait until he gets home from the office. And if I'm really lucky, I won't be charged a consultation fee... :eek:
     
  12. Yvonne's hubby

    Yvonne's hubby Murphy was an optimist ;) Staff Member

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    Ahem, In what way does one person buying property at market value "ruin farm families"? It may cause farmland prices to increase by the natural law of supply and demand, but overall it changes nothing to the individual existing farm family, other than increase their borrowing power due to having a higher value property on their hands. If the folks from town have a few extra bucks to put into buying a farm, whats the rub? The farm family that just sold it retires much more comfy than they would have if they had sold it for what grampa paid for the place in 1935! The neighbor can now borrow more money to expand against his increased equity. The fellow who purchased has a farm to work, everyone is or should be happy. Who is the loser here? Just askin, maybe I can learn a bit here. :)
     
  13. Arborethic

    Arborethic Well-Known Member

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    Wow! You've gotten some really cogent, accurate, advice here! But you need to dial in a few factors. First, do you live on the property. Second, what state are you in? Third, was the land/home used commercially.

    But, generally, if you live on it, and have been there for 2 years, you might seriously consider selling the whole parcel in order to cash in on the 250K/500K capital gains exclusion. Then you could move to another area and buy a lot more property, with a nice little nest egg to tide you over as you develop a new job/career or to invest for retirement.

    If you are married, then the total capital gains exclusion is $500K on a home.

    You were right not to trust the local real estate agent/s. First, they are NOT tax attorneys. They could, in fact, lose their licenses by giving tax advice, rather than refering you to a competent tax attorney/financial advisor.
     
  14. Cygnet

    Cygnet Well-Known Member Supporter

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    Thanks everyone for the wonderful advice. Exactly what I need to know. Sounds like I'll make just enough to pay off the house, once I factor in the cost of a survey and legal work. Almost exactly.

    I don't particularly want to move now, simply because of the logistics involved -- if I sold my house, I'd have to board the entire kit and kaboodle of critters. But I'd like to at least get the HOUSE paid off. That way, if the economy takes a dive, I'm in a better situation to deal.

    I eventually want a nice parcel of land somewhere remoter & higher in elevation. Having no payment on THIS place makes things much simpler when it comes time to move, if nothing else because I woujldn't be scrambling to make two house payments, or trying to move the zoo in one weekend or something insane like that. (We'd have to rent two u-hauls, one for the furniture, and one for the crates of animals!)

    I have two immediate neighbors who've sold acre lots quickly, so I know there's a hot market.

    Leva
     
  15. rambler

    rambler Well-Known Member Supporter

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    This is _not_ one person buying land, this is several dozen per year coming out of the suburban farm areas & bidding against each other, aprox 100 miles from the urban area. It totally destroys farm ecconomics in that area.

    Lets say a local father has 2 sons interested in farming. Ag land is worth about $2000 an acre. Instead of 1000 acres, they need about 2500 acres to continue the famly business, keep all 3 employed at a modest farm supporting 3 families. So, shopping for neighborhood land. Slowly, start out when the kids are in their teens, maybe take 10 years or more to expand to that 2500 acres.

    The Twin Cities is 100 miles away. Farmers in the suburbs are getting $20,000 an acre to sell out their land. They need to reinvest that money in less than a year, or get hit with taxes. So they have a ton of cash, and are in panic mode to spend it - create a new farm, save the taxes. They come out about 100 miles from the 'Cities, and bid against each other. Ag land suddenly is averaging $4000 an acre, with some going over $6000. Those 1031 folks _have_ to spend their money, and sometimes there isn't much land for sale. Instead of looking for 20, 40, 80 acres per year to expand a farm slowly (as the dad with 2 sons would do) these 1031 folks are looking to buy 1500-5000 acres at a time (they must spend all their money in one year....), all located close to each other. So, they will bid just totally wild on an 80 they need to 'complete' their new farm, might as well use up the 1031 tax base.....

    Now, the farm land _cannot_ pay for itself at these prices. It is an investment. It is a tax dodge. It is _not_ a sustainable business.

    In addition, with farm land values more than doubling, the $15 an acre property taxes due each year is suddenly $31 an acre. On that modest 1000 acre working famly farm that wanted to include the sons, their property taxes increased $16,000 a year. Greatly decreasing the family income at a time when they needed the money to grow the business to include the new partners - the kids who wanted to continue a small, average, 1000 acre a piece farm life. Those kids will have to pay an extra two million dollars in capital costs, plus $15,000 a year in taxes, because of and only because of the 1031 deal. Just to start farming a small family farm.

    That is not a 'little bit of cash from one person'. It is an end to the small family farm.

    It is not just a few bucks - it is the end to small family farms. Sure, it helps out 'dad' when he sells to the 1031 investors - because he can't afford the tax bill any more. But what about the kids? They will end up moving to the 'Cities, getting a factory job.

    I don't see how that is good for agriculture, or for rural communities, or the intent of the 1031 deal.

    Again, I'm not against those using it, but it has un-intended consiquences as it has played out, and the rule should be adjusted to allow all to play more fairly. Give the local people & ecconomy a chance.

    --->Paul
     
  16. Yvonne's hubby

    Yvonne's hubby Murphy was an optimist ;) Staff Member

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    ah yes, I see, the "small family farm". If my math is correct, you are talking about this farmer and two sons that own about couple million bucks (1,000 acres X $2,000 per acre equals $2,000,000) worth of farm, and now his boys wont be able to eak out a living on this tiny patch so they need to hog up every square foot at what "they think is a fair value". I think I am following the train of thought here. My grandpappy made a durn good living on 120 acres that he grubbed out of sagebrush with an iron rail behind a team of horses, he put in the irrigation system, leveled the land, raised a family and retired, lived a good long retirement from income produced from his farm management skills. His brother farmed 80 acres adjoining his, they lived well, lived long and happy lifes. I wonder why our "modern" farmers seem to have so much trouble?
     
  17. stanb999

    stanb999 Well-Known Member

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    See ya don't understand modern farming. Ya gotta get more land for the bigger tractor. So you can make more money for fuel and fertilizer. So you can grow more crops that sell for less. But you can still surive. If you can buy more land....No wait I did that already.

    The big thing that changed over our grandpa's time is TAX. His rate was <10% total thats if he paid any. Now it's above 49%. Yes thats right 49%. This includes income, property, State or sales, Fees for liscences. 1 man with a horse would lose his land to the tax collector and his kids to child services for "living that way". So you libs. that romanticise the family farm ARE the ones killing them.

    EDITED to say, Sorry this is off topic.
     
  18. BearCreekFarm

    BearCreekFarm Well-Known Member

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    I actually have to agree with rambler here. We must live close to him as we are 160 miles from the Twin Cities. We just finished wrangling for over two months trying to buy a new farm here in our community. The sellers hired a realtor who was from a town 50 miles closer to the cities, only 110 miles away. Somehow, between them, they decided the place was worth waaayyyy more than it is. They listed it in June and when we looked at it in August I don't think it had even been shown to anyone else. I do know that there had been no offers. We made an offer that was maybe just a little bit low, but not embarrasingly so, and the sellers (rude arrogant jerks to begin with) countered at slightly less than their asking price and basically told us not to bother making another counteroffer because they would not even look at it :(

    Eventually we did make another offer which they did not bother to respond to until 2 weeks and several phone calls from our realtor later. Again, same deal, told us not to counter. This all went on for a couple more weeks until we were sick of it and told our realtor we were pulling out. The next week their realtor called ours asking what was up! what a bunch of morons. Two weeks later they called and said that they would accept an amount which was slightly higher than our previous offer, but which was an amount our realtor stupidly told their realtor that we had considered our top ofeer if we made another offer. We hadn't, but we really wanted this particular farm, so we went for it.

    Point being, all along the sellers, who weren't from this area and had only lived here for 3 years, and their realtor, all expected to be able to sell at an inflated price to some yuppie from the cities with a bunch of 1031 $$$$ burning a hole in his pocket. Our offer is contingent upon the sale of my tree farm, and while we were negotiating, we kept telling our realtor to argue the fact that they offered a FARM for sale, and we wanted to buy a FARM, not some yuppie weekend home in the country, or hunting land. We kept working the figures over and over and even in the end we are paying more than we could have paid if we were dependent upon the farm for our entire income. How can a farmer pay $2000/acre and expect to show a profit? And no, this isn't a huge corporate mega-farm, it's a 240 acre family farm. Well, at one point, their realtor told our realtor that if we wanted to buy this farm, we would just need to sell my farm for more $$$, inferring that we would then have more 1031 $$$ to spend. But we kept going back and telling them that even if we HAD more $$$, their place still wouldn't be worth any more than what we had already offered. Crimey- if I were a millionaire, I still wouldn'y pay inflated prices just because I could afford to. But that's what a lot of these morons are doing around here. They would rather pay an inflated price for land and spend all their cash than to pay the capital gains tax on what they have left after buying more property. And it does, indeed, put local farmers at a disadvantage- in fact, the farm we just bought has not been farmed by the owner- the tillable acreage has been rented out for the past three years for the princely sum of $35/acre per year. Ok, so if we had paid the $2000/acre the seller wanted, you do the math and figure out the rate of return on investment- it's a long time, isn't it? And that doesn't take into account taxes, maintenance, etc.

    We actually got lucky, and there were factors other than price which came into play in our case. But, if the seller had not been broke and anxious to sell, if fuel prices hadn't gone through the roof at this time, if winter weren't fast approaching, etc., he may well have held out long enough to get his price, eventually. Lucky for us he could not afford to wait. And, we think his astronomical asking price scared off all the other potential buyers- we just happened to live close by and were willing to wait. We actually figured that the farm would still be on the market at the end of the year and we were going to make another offer then. Fortunately for us, the sellers got jumpy and came back to us.
     
  19. rambler

    rambler Well-Known Member Supporter

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    Hummm. I believe there are 2 people in my township with less that 1000 acres & no outside 'real' job other than farming. I'm one of them. The other one has 100 dairy cows in addition to his about 800 acres. Every farmer's wife works a town job, need the insurance & stable income. That includes the 5000 acre farmers. There is not enough income in farming.

    Your elders had $.26 cent fuel. I just paid $2.40 a gallon. Your elders could by a new 4020 tractor for $9000. A new 100 hp tractor is $28,000 or more these days.

    Back in the 60s dad got $1.20 for oats, $1.50 for corn, $7.00 for soybeans.

    This year my oats was worth $1.60, corn is $1.36 today, soybeans are just under $5.00.

    If you are so smart with the math, you figure it out.

    Less profit per acre, far less. Need more acres.

    If corn grosses $1.40 a bu, and you can get at most 200 bu an acre, that gives you $280 an acre. Subtract that $31 tax, subtract the $30 for seed, subtract the $40 for weed control, subtract the $35 for fert to get that kind of yield, rent would be $130 an acre, or your land payment on $4000 land is about the same, deduct your machinery costs, fuel costs, insurance costs, and you know what?

    There isn't much living left. With real good marketing, maybe you can push the corn income per acre to $2 a bu. Wow, maybe you can make $20 an acre these days, if you don't get hail or drought or a tractor/ combine breaks.

    Your elders probably made $100 an acre.

    Average living expenses back then were what, $15,000 a family? today it is what, $35,000????

    They, you, or I can't control those costs. It is the world we are in.

    If you can figure out how to raise 120 acres of corn & make a median wage, I am _all_ ears. Love to hear it.

    If you don't understand ecconomics, then perhaps you can improve the 'tude you have on this.

    Enough from me. Don't enjoy being insulted. Your's is the most insulting thing I have ever read on homesteadingtoday.

    --->Paul
     
  20. agmantoo

    agmantoo agmantoo Supporter

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    Here is what you have to do if you want the farm land.....take the profits you have made over the years and go to the hot spots and buy. When these areas rise then you sell and you have the 1031 money. Return to the community of choice and buy the property of choice. Everyone has the equal opportunity to participate! Who said you have to play the game on your home ground?