Non-expert thoughts on a tax problem.

[JB]

If you happen to be a CPA, please tell me when you give me your ideas. Otherwise, just plain taxpayer gut feelings will do.

The question is about long term capital gains, home sales and reinvestment.

Here is the multifaceted situation:

Part one: The Hideout is on the tax rolls as two parcels; 5.4. acres that I currently live on and 113.8 acres that I lived on for 8 years before I had this house built. I have been in this house for 11 years. The whole package has one address.

The 5.4 belongs to me. The 113.8 belongs jointly to me and 2 of my girls. Both are paid for. They are worth, according to comps, about 11 times what we/I paid for them 20 years ago. LOTS of bux.

Part two: My retirement money (plus a killing I made on Ford last year) is about gone. Yes, I give a lot of it away. Don't yell at me; I won't stop. It feels too good.

My girl partners are ready to build their dream home and have decided that The Hideout is too remote. They want to sell.

Part three: My next door (about 1/2 mile away) neighbor has expressed interest in buying. He knows how much I love this place and really likes having me and my "nature boy" ways as a neighbor. He suggests that he buy the whole place and rent me back the 5.4. He will give me full access to the 113.8 and use of my woods and ponds.

The idea of being a rental tenant doesn't appeal to me. It is an ego thing. I have thought of countering that he buy the 113.8 and an option on my 5.4 that he can then buy when I am gone or institutionalized. . . not likely to be more than 10 years.

Part four: Either way, if we do this there will be huge long term capital Gains. . . lots of zeros in there.

I think the girls would be okay on taxes if they just reinvest in new land and build their dream home.

I would take most of my portion and put it in fixed income paper if I stay here or a lakeside cabin if I sell him my 5.4.

The question: Can I exercise my one-time capital gains from home sales exemption for old farts on my gains from the 113.8 as well as the 5.4?

 

[rbh]

Re: Non-expert thoughts on a tax problem.

Question on part #1-
Are you able to subdivide lot (A and B total) into smaller sections.
10 x 10+ acres lots ?
While this may be a bit of work, is there profit to be had doing this in your area?

 

[JRJ]

Re: Non-expert thoughts on a tax problem.

The girls want to sell which is understandable. You don't have to sell your house and I certainly wouldn't want to rent it back either. Is it all or nothing with the neighbor?
The last thing I would worry about is taxes.
I just saw a US News headline about retired people running out of money. You are far from broke, you just have to take money out of one wallet and put it in another. Good luck.

 

[j_martin]

Re: Non-expert thoughts on a tax problem.

Neighbors have a way of changing, and/or forgetting promises.

I have hunted a little patch of woods behind my 20 for 30 years. The owner passed away and left it to his kids. They don't even live in the county, and don't hunt the land because they'd have to swim to get to it from their main farm, but they'd be durned if they'd allow me to hunt there. Nastygram in my mailbox one morning, real nasty.

 

[JB]

Re: Non-expert thoughts on a tax problem.

"Are you able to subdivide lot (A and B total) into smaller sections.
10 x 10+ acres lots ?
While this may be a bit of work, is there profit to be had doing this in your area? "

Probably not. Inadequate infrastructure to support many more residences. Water (potable) is the main issue. More important, I would not do such an evil thing to my neighbors.

"Is it all or nothing with the neighbor?
The last thing I would worry about is taxes."

No. He is open to options. His main priority is to protect our community from undesirable (to him) development or activity.

The taxes would be about what I earned in my best year. Further discussion on that would be political.

"Neighbors have a way of changing, and/or forgetting promises."

Changing or forgetting what is on paper could be terribly expensive.

Thanks for the input, guys. Anyone got any opinions on the question??

 

[Lion hunter]

Re: Non-expert thoughts on a tax problem.

I am no CPA nor do I play one on TV but it would seem that you want the feeling of ownership in the 5.4ac. Is it possible to sell the 113ac outright and do a type of reverse lease option on the 5.4? Where he would pay you installments for a set amount of time with no prepayment allowed. This would allow you to live on the property until he pays it off, your gains would be limited to the amount collected in a year and the property would become his upon payment in full (and you would have a monthly stipend coming in). As long as there are no leinholders involved I would think that anything is possible with the proper legal agreement. Another option may be that as a condition of sale on the 113ac that he has 1st rights in buying the 5.4ac should you decide to let that go.

 

[DECK SWABBER 58]

Re: Non-expert thoughts on a tax problem.

I say yes. Since all the acreage fall's under the same address it should all fall under the one time exemption.

 

[bruceb58]

Re: Non-expert thoughts on a tax problem.

Sounds like you are talking about thousands of dollars here. Time to hire a professional.

Just an FYI...long term capital gain rates increase in 2011 to 20% from the current 15% along with an increase in estate taxes. This is "throw mama from the train year" as all the estate tax rates go up as all the tax reductions put in place by the previous administration expire at the end of the year.

 

[Kiwi Phil]

Re: Non-expert thoughts on a tax problem.

JB, I can understand you seeking facts, suggestion, ideas etc, so you can construct a plan or two to pursue.
This sort of planning is never easy.

May I suggest that you take your plans to appropriate professionals, whether they be accountants or solicitors, for correct advice and contracts, that protect you, and meet all your future needs.
This may be especially important as you approach a period of your life when others may be called on to administer some of your affairs for you.

I am a little skeptical of, what can I say....look.....it may not be the good friend or child that could cause you issues, but maybe some person who has influence over them...be it a partner, sibling, pastor etc.

I am sure you fully understand what I am talking about, and that your decisions will be good ones.
My wife and I have similar issues ahead, and we have faith in our kids, but not sure of the 2 in-laws.

Take Care
Phillip

 

[Lion hunter]

Re: Non-expert thoughts on a tax problem.

I don't think that anyone would ever suggest you JB just take our advice and run with it without seeking professional assistance. Don't think he ever intended to do that either. But is is nice to go into the situation at least armed with ideas. I try and live by the idea that you can never know to much. I have been to several brilliant CPA's, but they don't know everything, and even if they are well versed there is so much information that they can overlook something. That is where some knowledge and ideas come in. When you can throw stuff out there they have overlooked and turn the lightbulb in their head on to even more ideas of how to hanle the situation.

Good luck and I hope it all works out well.

 

[Laddies]

Re: Non-expert thoughts on a tax problem.

Just went thru almost the same thing here in Michigan, I had 4 parcels of land that were physically connected and had a lawyer change the deeds to a single parcel with 1 deed and add a couple of children to the deed to help with a orderly change of ownership when I am gone. I don't know if that will work in Texas, something else that is possible here is to sell the property and retain a life lease or estate on it, that it remains in your custody.

 

[Huron Angler]

Re: Non-expert thoughts on a tax problem.

JB, I think the Taxpayer Relief Act of 1997 allows for something similar to what you are looking to do.

It seems like you would need to sell both parcels together as your primary residence to qualify, so you could then rent your house back with the cash you saved with the exemption.

Here's an article that addresses the exemption.

And straight from the source at irs.gov...click on "Excluding the gain" for the various tests to make sure you qualify.

Additionally, if the proceeds are used to buy new property don't they let you "roll it over" and defer the gains?

That way if your girls reinvest the money into real estate they might qualify for something too.

Good luck with the transaction, hope all goes smoothly for ya.

 

[aspeck]

Re: Non-expert thoughts on a tax problem.

As already mentioned, the Capital Gains rate increases on January 1, 2011. So before that time, you will save tax money. The Capital gains exemption is on YOUR primary residence. Not sure if the 113 acres qualify, but they would NOT qualify for your girls. It would be to their benefit to sell this year.

As for your 1/3, you could owner finance and that way any captial gains that might be owed by you would be parceled out over the next 10 years or so, plus you would be earning interest on the funds. It would give you income, and provide for the rent or lease of the 5.4 acres, if you decided to sell that portion also.

 

[JB]

Re: Non-expert thoughts on a tax problem.

Thanks to all for the information and wise advice. There are many tens of thousands of bux in taxes to try to avoid here. Be assured that I will have a good tax attorney at my side when I commit to whatever I decide to do.

 

[KRS]

Re: Non-expert thoughts on a tax problem.

JB, the capital gain exemption (for sale of a primary residence) has limits; I don't know exactly what they are. I also don't know the treatment of the 'excess land'.

Whatever you do, have the agreement ratified and managed by the title company so their is a 3rd party managing the account, making sure taxes get paid, etc. You don't want to lose your place of residence because he didn't pay the taxes and you are homeless. Protect yourself by managing the account at the title company (or attorney's office). Here in AZ we're a title company state; is TX a lawyer state for RE transactions?

I wouldn't sell your 5 acres. Leave an agreement in place at the title co to sell it in the future (like you said). But, specifying a fixed price for a future sale is bad medicine, I've seen it go bad. If you're gone, it'll be your heirs vs the neighbor; and any price out of the ordinary could end up in a nasty lawsuit. Most people choose to say (which I agree with), at the time the future sale will be consummated, the seller (or his agent) orders an appraisal, buyer orders an appraisal; and the average of the two appraisals will be the sales price as it is a fair value at the time of the sale.

Just some thoughts,

KRS