Real Estate Help

[Doughboy]

Need a little help for a buddy of mine from all of you tax/real estate guys around here. Here's the situation:

He bought a 1/2 acre lot in Destin about 18 months ago for $70,000 as an investment or possible retirement home, but it is cacant, and houses are popping up all around it.

He put down about $5000, and has basically paid about $500 per mnonth over that time frame towards a 30 year note.

He now has the opportunity to sell the property for $250,000 because the area is so hot righ tnow.

My questions are:

1. What will he have to pay in capital gains taxes on the sale. Not numbers, but a rate or an example so I get the jist.

2. If he were to do a 1031 exchange, what are his options to avoid paying taxes. I know that the rule is like property, but can he sell the property, and use the proceeds for a downpayment and avoid long-term capital gains?

I don't think he can swap vacant land for land with a house on it, but I think he could buy some property and maybe build a house. Also, I think his rate would be 25% for the long-term capital gains on the profits.

Thanks guys.

 

[freelancc]

if he builds a home on the lot.. it would easily go for $500,000.

if he lives in the home for 2 years... then sells it...:brows:




its a beautiful area.... why sell...:shrug:

 

[Doughboy]

He is looking to sell because he lives in Seattle, and pays $1600 per month in rent. He wants to buy a house or condo, and could use that money for the down payment and keep his payment reasonable. He can't afford as a single guy to buy a decent house there because Seattle's real estate market is equally hot now also and keep the property in Destin. If he were to try to buy a decent house or condo in Seattle, he has said he could spend anywhere between $200-300,000, and that is just too much for a single guy.

 

[freelancc]

i bought a lot on Santa Rosa Island and built and sold at Navarre Beach... its a hot area in terms of propery values now.

if he has to sell and move.. at least he will make a profit regardless of capital gains taxes.. not knowing his situation (and not being an expert) i would imagine 15% would be a safe estimate.. which is worth it to pocket a solid profit..

 

[Doughboy]

Yes, I was down there this past weekend and heard someone say that real estate in Destin is appreciating right now at an average of 5% per month. The question you have to ask is when is the time to cash out, although that area has never cooled off. I would have a tough time basically walking away from $150,000 of almost free profits if I were in his shoes and have 50% equity in my home.

 

[Doughboy]

bump

 

[TAZ]

Since it is property and it does not have a house on it to live in, as pointed out earlier, the whole gain would be taxable (sales price less basis), and I believe would fall into the 35% cap gain bracket.

To do an exchange and avoid tax on a gain, he would need to find like kind property. There are other hoops to clear but it is possible it could be exchanged for land or land with a house on it deferring the gain. Once he met the ownership tests of the new property the deferred gain would become excluded, ie $0 liability.

Hope it helps :shrug:

 

[freelancc]

:thumb:

 

[Doughboy]

Thanks!

 

[SixFive]

what an excellent problem to have! Congrats.

 

[spibble spab]

capital gains is temporarily at 15% in Ca. but of course John Kerry wants to jack that up. must be on title for 365 days to avoid it here

 

[spibble spab]

15% is quite a chunka change though

 

[Doughboy]

I know that long-term capital gains is 15% for stocks, bonds, and other equity like investments, but I thought real estate was treated differently.

 

[spibble spab]

i asked a tax attorney last wednesday. no way for me to get out of it. not even havin your cancelled mortgage check for IRS audit
of losing a kidney etc.

 

[Doughboy]

So the tax attorney said 15%? It could be worse. Could be 20%. Bush's tax cut in action I guess.

 

[spibble spab]

good point
good luck btw!