Unfair Exchange

» From: Pittsfield, MA

Dear TaxMama:

The purpose of 1031 exchange is to defer TAX (form 8824).

Then Tax Cut software puts the gain on form 4797 taxable.

Help.

Eldon

Dear Eldon,

I am not familiar with the peculiarities of TaxCut.

However, what you might want to do is check the calculations and see if they are correct.

If there is no taxable income, override the amounts on Form 4797.

On the other hand ... some people do come face-to-face with a shocking reality when they do Sec 1031 exchanges without professional guidance in ADVANCE.

The IS money changing hands during the exchange (even if you don't see it) - and there is often a portion of the sale that becomes taxable, as 'boot.'

It's a little complicated to get into, but ... think of it this way:

ONE - You sold your property.

You had sales costs - escrow, commissions, title insurance, etc. MONEY was used to pay those costs.

Did YOU deposit your own money into the escrow to cover them? If not, you received BOOT from the sale. YOUR money, from the buyer, went to pay those costs. Only part of the sales proceeds were used to fund the purchase of the replacement property.

TWO - You bought a new, replacement property. You had purchase costs - commissions, title insurance, etc. Repeat comments above.

Now .... Look at your Form 4797 again. Do the amounts on the Form 4797 seem to resemble any of the costs of purchase/sale?

Uh huh ...

That's why we get the big bucks. To keep this from happening to you.

You see, there are ways to fund the exchange, not get new loans on the purchased property and some other tricks, to keep the exchange completely tax free. Afterwards, you can get your cash back out by refinancing the new property.

Sitting down with a good tax pro who understands 1031 exchanges before the sale, might have saved you several thousand dollars.

Good luck.

Best wishes,

Eva Rosenberg
Your TaxMama

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