When is a Loss not a Loss but a losing gain?
| Read comments | Add comment / Rate this Article | Article by: Timothy Halligan |
With the collapse of the real estate market over the last year a many people feel that they do not have any capital gain issues on a sale because the properties have declined in value since their high in 05 and 06. However, the actual purchase price and the circumstances may make this loss a taxable event. Here are some examples:
Example 1: Definite loss
If a taxpayer bought an income property in 2006 for $800,000 and is now going to sell it for $600,000 today, they have a loss of $200,000; less depreciation that may be applied to offset future gain.
Example 2: Definite loss
If the taxpayer had placed a loan of $640,000 in 2006 on the $800,000 value and the property is now being sold for $600,000; the seller will have to pay $40,000 out of pocket at closing. They would still have a loss of $200,000 if it had been a straight purchase in 2006.
Example 3: Actual Gain
Now let's assume that in 2006 the seller had exchanged into the $800,000 property from a property that had been acquired in 1996 for $200,000. Let's assume they had taken $65,000 in depreciation leaving a basis in 2006 of $135,000 and a gain of $665,000.
If a taxpayer bought an income property in 2006 for $800,000 and is now going to sell it for $600,000 today, they have a loss of $200,000; less depreciation that may be applied to offset future gain.
Example 2: Definite loss
If the taxpayer had placed a loan of $640,000 in 2006 on the $800,000 value and the property is now being sold for $600,000; the seller will have to pay $40,000 out of pocket at closing. They would still have a loss of $200,000 if it had been a straight purchase in 2006.
Example 3: Actual Gain
Now let's assume that in 2006 the seller had exchanged into the $800,000 property from a property that had been acquired in 1996 for $200,000. Let's assume they had taken $65,000 in depreciation leaving a basis in 2006 of $135,000 and a gain of $665,000.
The property purchased at $800,000 through a §1031 exchange in 2006 is now being sold for $600,000. The basis is $135,000 and thus they still have a $465,000 taxable gain; not a loss of $200,000. (They can do another IRC §1031exchange).
Example 4: Actual Gain
If the taxpayer had refinanced the exchange property in 2006 for $640,000 and now they are selling for $600,000 they will have to pay $40,000 out of pocket at closing. Additionally, there is still a gain of $465,000 (Sale of $600,000 minus basis of $135,000).
If the taxpayer had refinanced the exchange property in 2006 for $640,000 and now they are selling for $600,000 they will have to pay $40,000 out of pocket at closing. Additionally, there is still a gain of $465,000 (Sale of $600,000 minus basis of $135,000).
If the bank accepts the loss of $40,000 the taxpayer has a forgiveness of debt. The forgiveness of debt is taxable and gets added to the basis of $135,000 giving us a new basis of $175,000.
$40,000.00 (forgiveness of debt) taxable
$425,000.00 (gain) taxable ($600,000.00 minus stepped up basis of $175,000.00)
$465,000.00 taxable at Long Term Capital Gains rates
Example 5: Actual Gain
A property was purchased in 2000 for $500,000 and in 2007 the investor refinances at the appraised value of $800,000. Now the taxpayer decides to sell for $600,000. His basis is $500,000, minus depreciation. If we assume depreciation of $70,000 our basis would be $430,000. There is not a loss of $200,000 ($800,00 minus $600,000) rather there is a taxable gain of $170,000. ($600,000 sale price - $430,000 basis).
A property was purchased in 2000 for $500,000 and in 2007 the investor refinances at the appraised value of $800,000. Now the taxpayer decides to sell for $600,000. His basis is $500,000, minus depreciation. If we assume depreciation of $70,000 our basis would be $430,000. There is not a loss of $200,000 ($800,00 minus $600,000) rather there is a taxable gain of $170,000. ($600,000 sale price - $430,000 basis).
It is important to note that if a seller uses this property in a §1031 exchange they would be able to defer their taxes.
Beware all may not be as it appears! A perceived loss may still be taxable.
This information is not intended to replace qualified legal and/or tax advisors. Every taxpayer should review their specific transaction with their own legal and/or tax counsel.
