New to this wonderful forum and not sure where to put this question. Hope it is in the right spot. If not, feel free to move it.
I’m looking and wondering what ideas you guys have when you are trying to minimize any capital gains. Obviously there is a 1031 exchange, but I’m looking more on the buyers side.
Basically I’m looking to buy this 3 unit and the seller is extremely scared of capital gains. He’s single and the equity in the building is above $250k. So I’m trying to figure out a way to minimize his gains in return for a better deal.
Any ideas?
Taking repair costs, fees, taxes, rents, security deposits, etc out to lower the capital gains is a given. But what else have you guys done before?
Fees and taxes are typically operating in nature and not deducted to determine cost basis in a property and thus capital gains. Rents are income and security deposits are a liability, again not figures in determining cost basis and capital gains.
Capital gains are capital gains - they are what they are and the IRS is relatively specific as to how they are calculated. Leagally, there is no good way to escape them. It is your responsibility as a taxpayer to be knowledgeable of the tax code (or find someone that is to help you) and to pay the minimum amount of taxes that you legally can.
From you post:
(1) Repair costs - no effect on capital gains. Capital improvements have an effect on capital gains. Repair costs are taken in full in the year that they are paid
Fees - some fees can be used to lower capital gains, some cannot
Taxes - no effect on capital gains. Taxes are taken on 1040, Schedule A (line 6) or on 1040 Schedule E (line 16) as an annual expense.
Rents - no effect on capital gains. Rents are income declared on 1040 Schedule E (line 3).
Security deposits - no effect on capital gains at all. They are neither income nor an expnse.
Your comment, “Basically I’m looking to buy this 3 unit and the seller is extremely scared of capital gains. He’s single and the equity in the building is above $250k” points to another misunderstanding of the tax code. The $250K ($500K if married filing jointly) has nothing to do with and cannot be used for income property – it is only for your personal residence. If the owner has lived in one of the units for 2 out of the last 5 years, he can claim a portion of the exemption for his living space.
I recommend that you ‘bone up’ on capital gains before you offer anyone else advice.
One thing that can be done to help (not eliminate but help) is for the owner to sell the property with owner financing and the capital gains are only due on the portion received each year…
Thanks for the info guys.
I was in no way offering advice to this guy or anyone for that matter.
I saw this situation that I’ve never seen before and came here looking for some good advice. Obviously I’m a little wet behind the ears when it comes to capital gains.
Basically there is no way to help reduce his capital gains then.
He could do owner financing like kdhastedt said, but he’s still going to have to pay eventually.