How to reduce taxes when selling rental
1031 exchange is the only way to go
By Ilyce Glink, Friday, April 4, 2008.
Co-written by Samuel J. Tamkin
Inman News
Q: What are the best strategies to minimize the tax liability on a rental sale? We bought a single-family home and lived in it for a couple of years, and then rented it for the last six years. We'd like to sell it but are concerned about a hefty tax bill.
I own another home that we use as an office. Can I roll the gain from the first property to pay down the note on the office?
A: The rental property you used to use as a home is now considered an investment property by the IRS.
As an investment property, you can either pay the taxes owed upon sale of the property, or defer the payment of real estate taxes due upon the sale. If you choose to defer the taxes you owe, you'd utilize Section 1031 of the Internal Revenue Code. This section allows a rental property owner to sell the property and defer paying taxes upon the sale if the property owner sets up a tax-deferred exchange, also called a like-kind exchange or Starker Exchange.
Unfortunately, a like-kind exchange would require you to buy a replacement property for the home you are selling. It would not allow you to sell the property and use proceeds from the sale to pay down the debt on one of your other properties.
You could sell only your first property and buy a replacement property or replacement properties. That replacement property or properties must have a value equal to or greater than the property sold, and you would have to adhere to strict time limits in purchasing the replacement property.
Upon sale of the investment home, you would have to set up an exchange through a company that specializes in 1031 exchanges. All proceeds from the sale of the property would have to be held by that company.
You would then have 45 days from the date you closed on the sale to find and designate a replacement property, and you'd have to close on the purchase of that new property within 180 days of the date of the sale.
In some instances, the 180-day time limit may shrink. Be sure you choose a knowledgeable and reputable 1031 exchange company.
Q: My fiancé and I bought a home in 2004. Her name is not on the mortgage, but she is listed on the deed as part owner. We would like to have her taken off the deed. Is there a way to do this? I wouldn't think we need to refinance because she is not on the actual loan.
A: You are correct. You can probably take her off the title to the property by having her transfer her interest in the home to you.
She would have to execute a deed to transfer her ownership interest in the home to you. You can use a quitclaim deed or other deed form to accomplish this transfer.
In simple terms, a quitclaim deed transfers any interest a person may have in the property without making any representations as to whether that person owns the home. A warranty deed performs the same task but gives the buyer (or person receiving the title) a representation that the person signing the deed and conveying a property has an interest in that property to convey.
Most people use quitclaim deeds to transfer title between themselves. Sometimes, and for obscure title insurance purposes, it may be better to use a warranty deed.
But you need to keep a couple of things in mind when transferring title.
First, there is the cost. In some jurisdictions, municipal officials in their quest for additional revenue are taking a harder line on quitclaim deeds where the parties claim there was no consideration that changed hands between the parties. If a transfer tax is applied, it can make that transfer quite expensive.
Second, you should talk to your accountant to determine if there will be any tax consequences to the transfer. When you and she took title to the home, you each may have become equal owners to the home. That ownership should have had some value. Was her share of the home at the time of the purchase a gift from you to her? Now that she has ownership, is her transfer back to you a gift from her to you? Depending on the amounts involved, you may have reporting issues with the Internal Revenue Service.
Finally, while you did not say why you were unwinding the ownership, if you are breaking up, you're on the right track. But if you're getting married and for other reasons are taking her off the title to the home, make sure you have a will or other estate plan in place. You'll need to take care of your interest in the home should something happen to you and her interest in the home, if your plan would be to have her have the home if something should happen to you.
Please call me today if I can help you with an Investment purchase or sale!!