 Hindsight
and capital gains taxes
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 Dear
Tax Talk,
I recently sold some property that I owned for about 18 months.
I paid $85,000 for the property and sold it for $120,000. The only
improvement I made on the property was to put a well on it. Do I
get to subtract my down payment, monthly payments and/or the price
of the well from the sale price to determine what amount I have
to pay capital gains on? If I reinvest the money, do I have to pay
capital gains? Can I put the money into some sort of retirement
plan such as an IRA or a certificate of deposit for a fixed time
and avoid paying capital gains? Thanks.
-- Cathy
 Dear
Cathy,
These are some things you should have thought
about before selling the property. You could have entered into a
like-kind exchange had you set it up before closing on the sale.
In a like-kind exchange, you work with a middleman to close on the
sale of the property you're giving up and use that person to acquire
the property you're replacing it with, delaying the taxes.
The rules say that you can't receive cash in the sale;
otherwise you pay tax immediately. So that's where the middleman
comes into the picture. The intermediary actually receives the cash
from the property that you're selling and uses that money to buy
the new property. Unfortunately, since you already received the
cash from the sale, you can't do a like-kind exchange.
Your gain on the sale is the difference between the
selling price and the cost of the property. You can add the cost
of improvements to your cost. Your down payment is already included
in the property cost, so you would not add that to your cost. The
interest portion of your payments should be deducted as investment
interest on Form 4952. You can deduct investment interest to the
extent of your investment income, such as interest income and the
gain on the property.
However, deducting the interest against the gain requires
you to forgo the preferential long-term capital gains tax rate of
15 percent to the extent of the interest deduction. If you can otherwise
deduct the interest, this may not make sense, so I suggest you have
a professional evaluate your situation to determine what is best.
Unfortunately gains from property sales cannot
be deferred by investing in an IRA or a CD. If you are otherwise
eligible to make an IRA contribution, you can do that independently
of the gain.
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