Wednesday, January 25, 2006
IRC 1031 Exchanges
It seems simple enough: First I hand the title of the Hawaii property to the QI, who sells the Hawaii land and takes receipt of the money. Then the QI buys the Tustumena Lake Road lot and hands that title to me. The QI never actually takes possession of either title in the process, they just receive and pass on the titles. The buyer of the Hawaii land and the seller of the Tustumena Lake Road land are technically part of the exchange, but they don’t have any additional financial or tax-related involvement.
The capital gain from the Hawaii land would otherwise be taxed at 20%. If I exchange the full amount – I think the amount has to include the original cost basis and all the gain, I’ll essentially defer the tax until I sell the land on Tustumena Lake Road (or exchange it for something else later). It’s like a tax-free loan from the IRS that doesn’t get paid off until we sell this new property (and don’t just exchange it again). This deferred tax is not attached to the estate, so if I kick off before selling that exchanged property, the tax liability is forgiven.
Supposedly, “you cannot extract cash from an exchange, or if you do, it is taxable as what is termed "boot." A successful exchange moves up in price and up in equity from the property sold to the property replaced.” If the Tustumena Lake Road property costs less than the Hawaii land sells for, then I'll have to pay the 20% capital gains tax on the remaining “boot”. Then I’ll still eventually owe the IRS the tax on the deferred gain when I sell the Tustumena property. Additionally there will be some fees with the QI.
In the end, it may actually be too late for us because the Hawaii property has gone into escrow.
I don’t really want to go into my cello playing today, but that’s why I’m doing this blog, so: I didn’t get to play early like I’ve been doing, instead I had to go to town. So after lunch I setup and began to play. I was drowsy and the direct sun made me hot. I was surprised to find that the G string had loosened a whole note. The only thing I can think of is that the peg got hot from the sun yesterday afternoon and then cooled off beside the window overnight (-25F). Why not the other pegs? This hasn’t happened before. I got it retuned, and ran through the scales and rhythms for about 45 minutes. I worked the first 6 or 7 exercises for another 45 minutes. I just wasn’t getting a good sound – maybe the cold and the sun affected the whole cello. So, I put the cello away.
I’m also jittery about Saturday’s lesson. I have no idea what to expect.