Tax? Real estate cap gains.

[Michael Drew]

I have always done my own taxes. They've never really been all that complicated, so I just do it. Been using TurboTax the past several years.

Last year was a bit different, in that I sold a piece of land. I was unable to find another property in time for a 1031 exchange, so I am now trying to figure out what my capital gain tax is.... And, to complicate things, I live in a state where there are no income taxes, but the property I sold was in Colorado, and I'm almost certain I am on the hook for that state.

I'm working through the forms and reading IRS publications, and I can't find a specific yes/no answer. I'm trying to determine the cost basis of this property I sold. I took out an amortized 3 year long to help fund the purchase of this property. I paid roughly 20K in interest on the note. Question I have is, can I add this to the land basis? Technically, it was a cost associated with the purchase of the land. I have not been able to find a direct yes/no answer to this question. Might anyone have done this before, and know the answer?

[Jim Koepke]

There are even more questions involved.

Was this a rental property? If it was, you may already owe taxes in Colorado.

Was the interest deductible on your federal taxes? This is a question for a tax expert.

Did you take a depreciation allowance? There is recapture due on this if it was depreciated.

My recollection was when my property was sold in California there was CA State taxes due. Even though other income of mine originates in California it isn't taxable. There was a court case on this many years ago, involving living out of CA State while collecting a pension from a CA entity, leaving some income like pensions untaxed and other income like rents taxable.

I used to do my own taxes when it was a simple "this is what I made, this is what you get" process.

Now it is more comforting to pay a professional and let them be on the hook for any mistakes.

jtk

[Bill Dufour]

I would guess no. You paid a set price and then got a loan. Two seperate things even if from the same seller. The interest was not part of the price, it was something extra you offered to pay instead of getting a loan elsewhere.
BilLD

[Jim Koepke]

I would guess no. You paid a set price and then got a loan. Two seperate things even if from the same seller. The interest was not part of the price, it was something extra you offered to pay instead of getting a loan elsewhere.
BilLD

At one time interest on many loans was tax deductible.

jtk

[Michael Drew]

Not a rental, it's just a piece of dirt. 5 acres on a lake. I was going to build my retirement home on it, but decided to look elsewhere.

When I work through the form to determine the "cost basis" that determines what my capital gain is (long term), I can either add costs to the original cost of buying the property, or I can subtract costs to the sale price. Both will bring the basis closer to the middle of the adjusted cost for determining what my "gain" was on the initial purchase. For example, I have about 10K that I paid for land surveys, soils analysis, eco studies, etc. Those are all cost adders to the original cost. On the other end, I have sales commissions that subtract from the sales price of the property, reducing the gain.

There are also line items called "other costs", that are vague. Those are where I think I may be able to add costs to the work sheet, but I can't find a definitive answer.

I may end up paying someone to do my taxes, but am hopeful I can get it done myself. I have a masters in business management - but my area of study was not finance. Still, I should be able to figure this out.

[Ron Citerone]

https://smallbusiness.chron.com/calculate-profit-multifamily-home-37679.html

I googled this.

[Tom M King]

I would deduct the interest under other costs. They're so short handed that they won't figure it out either. I sure it can be deducted somewhere, but don't know where. I also do my own taxes, so I'm saying what I would do, and not making a recommendation.

[roger wiegand]

There are times to hire a tax professional, this sounds like one of them.

[Jim Becker]

There are times to hire a tax professional, this sounds like one of them.
^^ THis.....

[Warren Lake]

old guys taxes were done when he sold his home 40 plus acres and shop. Told a friend of his huge cap gains. She said not so sure. She went into town archives dug up stuff no one understood, Sent him to her accountant and his stuff was re submitted. Original tax people well known name everyone knows. In the end he got six figures back. Turns out pros are not always pros. Friend had a lifetime of real estate experience and as a developer so knew stuff that the big tax firm didnt didnt.

[Maurice Mcmurry]

One of my clients is a Tax Lawyer. I was getting frustrated with him one day because I could not communicate some simple woodworking problem. We were interrupted by a call he had to take and I was treated to hearing him quote chapter and verse several paragraphs of tax law, recited from memory, he solved his clients problem with a level of skill that was very impressive and inspiring. My patience level went up several notches.

[roger wiegand]

old guys taxes were done when he sold his home 40 plus acres and shop. Told a friend of his huge cap gains. She said not so sure. She went into town archives dug up stuff no one understood, Sent him to her accountant and his stuff was re submitted. Original tax people well known name everyone knows. In the end he got six figures back. Turns out pros are not always pros. Friend had a lifetime of real estate experience and as a developer so knew stuff that the big tax firm didnt didnt.

Yes, stay away from the Big Tax Firm(s) (You know who I mean) You want a local CPA with a tax specialty or a Registered Agent with the right experience.

[Ron Citerone]

There are times to hire a tax professional, this sounds like one of them.

My wife sold her deceased father's house last year. It was titled to her and her sister. We usually do our own taxes but knew we needed help and hired a CPA for this one. He agreed that normally we should just do our own but for this one year professional help would be a good idea.

[Warren Lake]

The developer knew what no one else would know. Not some lawyers, not real estate agents and not the tax firm. My father was an actuary and it was stuff he would not know.

in talking to lawyers on a home sale it was clear some of them didnt know about first time home exemption based on the Rideau Law. Lucky one past long time real estate agent had just found out first time and brought it up, others I spoke to had never heard of it.

[Jim Becker]

Warren, the OP's situation is complicated by the fact that the property in question isn't the property where his home is that he lives in. It's a separate parcel in another state.

[Michael Drew]

Correct. I cannot claim it as a second home, vacation home, or rental property. For tax purposes, it's simply an investment and is taxed as a capitol gain (once the adjusted gain/loss is calculated). But, because I got a 1099-S from the title company, I have to enter this as a home on the 1040. I can't work it into the investment category of the tax software because investments are not reported to the IRS on 1099-S forms. At any rate, seems to me that all interest, and not just interest in the calendar year of the sale, should all be considered "costs" to acquire the asset. If I had or new a CPA, I would already have dropped the paperwork off. I do not though, and will need to find one. I really was not expecting this to be so damn difficult. I'm tired of reading IRS publications that refer to other publications, that refer back to the first one, then to another..... GRRRRRR

[Ron Citerone]

My personal opinion is the loan interest is not counting toward your cost basis, that is my unprofessional opinion. I get the feeling that you have decided you need professional help. You have plenty of time before taxes are due but not that much time. I think you should put your energy into trying to find the name of a competent CPA from Family and friends in your state/area whose opinion you trust and go from there. Don't let your frustration get ahead of you, it will all work out IMO.

[Tom M King]

I did a Google search for "interest deductible on investment property?" and found plenty of information.

copied and pasted:

To actually claim the deduction for investment interest expenses, you must itemize your deductions. Investment interest goes on Schedule A, under "Interest You Paid." You may also have to file Form 4952, which provides details about your deduction.Dec 1, 2022

[Lawrence Duckworth]

File an extension...

[Jim Becker]

File an extension...
And extension is only for filing the "forms", not for paying the tax owed, so it's honestly of little use in most cases.

[Lawrence Duckworth]

And extension is only for filing the "forms", not for paying the tax owed, so it's honestly of little use in most cases.

exactly...he won't be skipping out on paying any taxes, but he'll have more time to find a professional and get it right. My accountant recommends filling an extension every year... go fig'r

[Michael Drew]

I'll be fine. I will do as I always do, be conservative. I found a YouTube channel where a CPA posts tutorials on the various forms and use of TurboTax. Almost like sitting in class. Very helpful. https://www.youtube.com/@JasonDKnott

It looks as if I can claim some mortgage interest, but not all. Some for active income deduction, some for NIT tax, some for basis calculation. None are big, but they all add up.

I'll definitely be thinking about taxes a hell of a lot more the next time I make a major purchase, including the state where I buy it.

[Patty Hann]

Maybe 30 years ago my financial advisor suggested I invest in a petroleum related tax shelter.
Up to that time I was doing my own taxes, but not using Turbo tax because my primitive "stone-knives-and-bear-skins" computer didn't have the capacity to handle TT.
And that was OK because (up until that time) my taxes were pretty easy to do even "long-hand".

So come February of that year I get a statement for said tax shelter investment and have no idea what to do with it.
After reading through all kinds of IRS Pubs, I finally (I think) figure it out.

I do my return and that Tax shelter added about 6 extra forms, all of them requiring at most 2 entries; actually I remember one form needed two entries, the others needed only one entry.
In the end I had avoided paying less than $10 in taxes on that investment.... and it only took me 6 hours of wading through the IRS pubs to figure out how to enter the info.**

So I did two things after I filed:
1) Called my advisor and told him to liquidate the investment, and
2) Found a different advisor

**Apparently I filled out all those extra forms correctly because I never got notified that there was an error, or that I owed any more taxes

[Clifford McGuire]

There are times to hire a tax professional, this sounds like one of them.

Definitely this ^^^^^^^^ . But I can tell you my situation.

In 2019, I sold my Colorado land that was to be used for retirement. I was living and working in another state at the time.

- The gain was taxed (by Colorado) as long term capital gain.
- The interest was not deductable.
- I had to file a Colorado tax return, just for this purpose.
- Colorado wanted their tax money up front, even though I sold the property on land contract and the buyed paid me over three years.

I was glad to have a tax professional handle it.

[Frederick Skelly]

There are times to hire a tax professional, this sounds like one of them.

Yup. ......

[Bill Dufour]

Parts of California have automatic six month extension for the filing deadline. Have to be a in a FEMA disaster zone county to qualify. I think payment is due April 15. Not really sure why my county qualifies? Maybe fires on eastern edge.
Bill D

[Jim Becker]

Tax payment is due 18 April this year, regardless of filing date.

[Jim Koepke]

My accountant recommends filling an extension every year

Some of my friends, family and acquantences insist on doing this every year as a "stick it to the man" kind of protest.

In my case it is better to get it done and enjoy it being over. Plus the California Franchise Tax Board requires some of my income from a trust be withheld. This is always refunded, so there is an incentive to get it over with and done.

jtk

[Ron Citerone]

A wise man once told me the problem with sticking it to the man is the man don’t care.

[Bill Dufour]

My sister's high school french teacher gave all the seniors a F progress report for second semester. I guess she had been burned by previous seniors who could not fail because no progress report had been issued.
Bill D

[Kent Cartwright]

I'm a CPA but I don't do taxes, so let's start with that caveat :-). You have several things going on that by themselves would take a little research, but add in the out-of-state situation and I would say go spend the $ on a pro. In the overall scheme of things your tax situation is not that complicated for a pro, so it shouldn't take them much time. This is especially so if you don't have a side business to claim and/or depending on whether you itemize. If you don't itemize, then this becomes even simpler. Regardless, I would be surprised if you didn't have a tax obligation in Colorado. As for whether a CPA in Alaska would know about Colorado tax law, well most of them use software that is like TurboTax on steroids, and their software helps them figure out what questions to ask. The software will have access to Colorado tax law and forms, plus your CPA will likely have contacts, either through the software company or professionally, with folks in Colorado who can help them get past thorny questions they might not be familiar with.