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Marty Couch
Investor
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Capital Gains
Tuesday, October 24 2006 01:25 PM
Hi All,
I have an investor who has a property under contract for $460,000.00. The couple selling are married and have lived in the property for 2 years.
He has a buyer who is willing to buy the contract for $140,000.00. My investor wants to assign the contract and cash out the $140,000.00 at the close as his end buyer does not have the cash to pay the $140,000.00 outright. The property has a value based on comps of $650,000.00.
The question is, if the settlement statement shows the purchase price of $600,000.00 will the sellers be responsible for $100,000.00 in capital gains?
Any information would be appriciated.
Thanks,
Marty
Marty Couch
http://www.PPLChicago.com
REPLY
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Randy Hughes
Master Advisor-39 years of experience
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Re:Capital Gains
Wednesday, October 25 2006 04:19 PM
Marty,.
Am not sure i understand the situation you described. Is the profit to the investor 140,000? Whatever the profit is...if the closing statement shows 600K as a sales price the profit or assignment value should be shown as a line item called "to clear title" and would therefore be a reduction in the ultimate sales price and therefore the cap gain. The best way is to handle the investor's side of this is: outside of closing so the amount isn't shown on the closing statement.
Randy Hughes
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MB
accountant
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Re:Capital Gains
Wednesday, October 25 2006 08:06 PM
I think what the question meant to deal with was the $250,000 per person that can be excluded from tax on the sale of a principal residence. If sellers (S) sold to Investor (I) and then investor (I) assigned the contract to buyer (B), it is as if B is purchasing the property for 600,000. Of this 600,000, 460,000 goes to S and 140,000 goes to I.
I would say they will definitely not have to pay capital gains on the sale (assuming all conditions are otherwise met to qualify for the exclusion) because even though B is paying 600,000, the profit of S is less than $500,000. How this gets reported by the title company or attorneys will determine whether the sellers need to report anything on their taxes. If they were to receive a 1099-S, then they should report the capital gain they really received on Schedule D but include a negative amount to offset the gain on the next line and use section 121 exclusion as the description. For example if they receive a 1099-S for 600,000 and their cost of their property including improvements is 250,000, they could say sales price 600,000 and cost 390,000 which would give a capital gain of 210,000 (460,000 less 250,000). Then a loss of 210,000 would be on the next line so the net gain is 0.
If they do not receive a 1099-S, nothing would need to be entered on the tax form for this transaction. Since they are really selling their property for 460,000, they should not get a 1099 but it will depend on how the closing company handles this.
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