1031 Exchanges

Q: I purchased a house more than 10 years ago, renovated it, and for the last four years I have rented it out. A few years after purchasing the house, I bought an adjoining lot. Now I want to sell the lot. If I sold it, how would I calculate the profit? To save on taxes, would it be preferable to exchange my lot for another property? Could my land be used as a down payment on a house?

A: The fact that you own a house on the adjoining lot would have no bearing on the profit from the lot sale. If you sold the lot, the taxable gain would be calculated by subtracting the original lot purchase price from the sale price.

You could defer paying tax on the land if you did a 1031 like-kind exchange. The number 1031 refers to the section of the U.S. Tax Code covering such transactions. To qualify for a 1031 exchange, each party must use the property received for income or investment purposes. Residential properties are ineligible unless the new owner changes the use after receiving it.

In a 1031 exchange, you can trade your land for either vacant land or land with a rental house on it. You can also exchange your land for more expensive property, paying cash to cover the difference in value.

For example, if your land is worth $ 10,000 and you want to exchange it for land worth $ 50,000, you would also pay $ 40,000 in cash. In a 1031 exchange, the tax on the profit is deferred until you sell the property or exchange it for property that doesn't qualify under 1031 rules.

Q: My husband was married for less than a year to another woman. During their marriage, they purchased a house together. Both of their names appear on the deed and mortgage. This year, my husband is paying his former wife the balance of a promised sum to obtain full ownership. The divorce was not a friendly one. What is the correct way to have her name removed from both the deed and the mortgage?

A: Your husband and his ex-wife could remove her name from the deed by having a new deed drawn up and filed with the county clerk. Before filing the new deed, your husband would have to file a transfer tax return that includes any tax owed.

In Nassau and Suffolk Counties, a tentative assessment form is also required. This form is used by the state to determine whether the property should be reassessed.

However, removing the ex-wife's name from the mortgage may not be as easy. Your husband should talk to the lender before the transfer. Most mortgages have a so-called due on sale or transfer clause that allows the lender to demand repayment of the loan balance when the property is transferred, he said. If that happens, your husband might be able to refinance in his name, or both your names, if your income is sufficient to qualify.

The lender might agree to remove the ex-wife's name from the existing mortgage if your husband has income sufficient to make mortgage payments himself. The lender might also agree to add your name. But there is no guarantee the lender will do either. Because of such uncertainties, many divorcing couples sell their home in a settlement and divide the proceeds.

1031 Tax |