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Timing of property sale could change your tax bill
Dear Tax Talk:
My partner and I want to buy an investment
property, and hope for a profit of $40,000 when we sell within six
months. If we don't do the 1031 exchange, what are we looking at
for taxes on capital gains?
Thanks,
Jennifer
Dear Jennifer:
I'm assuming you and your partner are not in the business of
buying and selling properties on a full-time basis and that you're
just trying to capitalize on an opportunity.
If you don't want to do a like-kind
exchange, then you're looking at paying taxes on the gain, split
amongst you in proportion to your ownership interest.
A like-kind exchange would be the only way to defer
the tax.
I've probably answered this question in one form or
another over the years I've been doing this, so the real reason
I picked your question has to do with the time frame in which you
expect to turn the profit.
If you buy and sell the property in six months, you'll
realize a short-term capital gain that is taxed at the same tax
rate that applies to your other income. This could be as high
as 35 percent on your 2003 taxes.
To qualify for the maximum tax of 15 percent
applicable to long-term capital gains, you'll have to own the property
for a year and a day. I've had clients who forgot that the holding
period for long-term gains applies equally to all property, not
just stock.
-- Updated: March 4, 2004
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