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Investors Beware
By marionduffy | November 2, 2009
Many savvy investors buy and sell real estate by doing 1031 exchanges. With the decline in real estate prices over the last few years, some investors may think they are selling a property at a loss and therefore do not need to do another 1031 exchange. But before you do anything, be sure and consult a tax professional because you may have a taxable event. If you acquired the property through a 1031 exchange and are now selling the property for a lower price than you paid for it, you may actually have a gain instead of a loss. The key to remember is that with a 1031 exchange you carry the adjusted cost basis from one property to the next.
Consider this scenario. Let’s say that several years ago you sold a rental property for $350,000. The adjusted cost basis of that property was $100,000 so you had a gain of $250,000. Rather than pay the taxes on the $250,000 gain, you deferred the taxes and bought another property through a 1031 exchange. You paid $350,000 for the new property.
Now in 2009, the property you purchased for $350,000 is only worth $250,000. Even though this is $100,000 less than you paid for it, you still have a gain of $150,000. Remember that you transferred the $250,000 gain from the first property to this property. After you deduct the $100,000 loss, you are left with a taxable gain of $150,000.
This is a very over simplified example, but the point is that if you have bought or sold, or plan to buy or sell through a 1031 exchange, consult a good tax professional first.
Topics: Selling a house, Real Estate Prices, Investment Property, Distressed Properties, Short Sales |