Cash-out from sale comes with a tax bill
Author: boored
Category: Real Estate
Question: I own a rental property that is 12 months from having its mortgage paid in full. I am considering an Internal Revenue Code 1031 tax-deferred Starker exchange for a rental property closer to my home. Must all the cash realized from the sale be used as a down payment on the property to be acquired, which will be of higher value, or can I take some cash out and just carry a larger mortgage?
Answer: The general rule of IRC 1031 is that you must trade equal or up in both price and equity. That means if you take out any cash, it will be taxable to you.
However, if you want to take out cash, you can refinance either property before or after the trade but not as part of the trade transaction. Consult your tax advisor for details.
If name is on title, take the deductionQuestion: I am paying half of my son’s mortgage, but my name is not on the loan. However, my name is on the title to the home. Can I deduct half of the mortgage interest and property taxes on my 2007 income tax returns?
Answer: Yes. It is irrelevant that your name is not on the mortgage obligation. What matters is that your name is on the title to the residence, making you legally obligated to pay the mortgage and property taxes.
Therefore, you are entitled to deduct the mortgage interest and property taxes you pay in 2007 on your 2007 federal and state income tax returns.
Quitclaim deed may be worthlessQuestion: My wife and I have been having marital problems for years. About six months ago, she got me to sign a quitclaim deed for my half of the house, but she has not recorded it. Is there anything I can do to stop her from recording it? There were no witnesses to my signature.
Answer: The exact requirements to record a quitclaim deed vary from state to state. If you signed a quitclaim deed but there weren’t any witness signatures or a notary public’s acknowledgment stamp on the document, it probably is an unrecordable document.
Technically, that deed might be valid between you and your wife. But if it can’t be recorded, that document is virtually worthless.
Consult a real estate attorney.
Consequences of skipping permitsQuestion: I have had much work done to my home without permits. When I sell it, is this a case of “buyer beware”? My house now has more square footage than shown on the official county records. A problem?
Answer: When you decide to sell your home, you will regret not following the permit rules.
You ask if this is a case of “buyer beware.” Today’s rule has become “home seller beware of the buyer.”
To protect yourself from after-sale lawsuits, you must disclose all known defects with the house, including the lack of building permits.
A buyer who purchases your house should demand a large discount for the risk he or she is taking. If the buyer decides to make improvements requiring a building permit, the building inspector could insist the illegal improvements be “legalized.” The building inspector might demand opening up the walls to inspect the wiring and plumbing.
If the assessor discovers that your house now has more square footage than shown on the tax-assessment records, you might be assessed for back taxes, called “escaped taxes.”
When the buyer’s mortgage appraiser evaluates your home and checks the official records, the appraiser will deduct market value for the illegal space you added.
In summary, you made a serious mistake by not obtaining building permits for the work performed on your home.
Source:
investment property
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