Capital gains on Commercial Real Estate Query

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Topic Author
Don46
Posts: 198
Joined: Sun Feb 24, 2013 5:53 pm

Capital gains on Commercial Real Estate Query

Post by Don46 »

I inherited a Commercial Real Estate (CRE) property in 1996 when my mother died. My cost basis was established at about $500k.
I rolled this over into a second and then a third 1031 exchange property.
I do not have the details of the first exchange, but at the sale of the second CRE in 2005 I came away with a net of $740k.
My third and final property I bought for $1.2 million, using my $740k + a bank loan of $460k
I am about to sell this third property for $1.3 million. I refinanced along the way and now owe $500k on the property.

How do I figure my capital gains on this sale?
I understand that my original cost basis ($500k) is subtracted from the current value: but what is that latter number?
How does the borrowed money figure into the calculation of the net proceeds?
My accountant tells me that it is 1.3 million less the original cost basis $500k. (ignoring commission, fees, depreciation for the moment)
This does not make sense to me because a good share of the Fair Market Value I owe to the bank.
Capital gains ought to be based on some calculation of NET gain in my mind.

Thanks for whatever help you can offer on this.
ppc
Posts: 21
Joined: Sun Sep 21, 2008 11:27 am

Re: Capital gains on Commercial Real Estate Query

Post by ppc »

Your basis would be the original $500k + the $460k you contributed to purchase the third property, so your total basis would be $960k.

It is not relevant whether the $460k was borrowed or whether you brought $460k in cash to the closing of the purchase of the building.

With a sale price of $1.3 million, your capital gain would be $340k.
Topic Author
Don46
Posts: 198
Joined: Sun Feb 24, 2013 5:53 pm

Re: Capital gains on Commercial Real Estate Query

Post by Don46 »

thank you. That makes perfect sense. Otherwise I would, in effect, be paying capital gains tax on money I borrowed.
Can I ask how you know this or what your authority is? I'm not doubting you, please be aware.
My CPA charged me $550 to review this deal and tell me what my tax exposure would be. He set up the 1031 exchange. He knows about the loan because I've used him every year since to prepare my taxes. I spoke with him about it two times and he stuck to his scenario.
I looked online at the IRS site, and publication 544, on sales of assets, and it was (surprise) complicated and opaque, but it seemed clear that the loan would factor into the capital gain calculation.
I need to confirm this and then talk with my CPA (and then find a new one).
Many thanks.
ppc
Posts: 21
Joined: Sun Sep 21, 2008 11:27 am

Re: Capital gains on Commercial Real Estate Query

Post by ppc »

IRS publication 551 explains how to calculate basis.

http://www.irs.gov/publications/p551/ar02.html

"Example. If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000."


"Property plus cash. If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. "
Topic Author
Don46
Posts: 198
Joined: Sun Feb 24, 2013 5:53 pm

Re: Capital gains on Commercial Real Estate Query

Post by Don46 »

It was hiding in plain sight! I take back my swipe at the IRS. Thanks for helping me on this. This makes a huge difference in what I take away from this deal. Now I'm going to have a talk with my CPA ... and then find a new one.
MarkNYC
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Joined: Mon May 05, 2008 7:58 pm

Re: Capital gains on Commercial Real Estate Query

Post by MarkNYC »

Not sure why you're ignoring depreciation in the calculation of adjusted basis, since it's a significant factor in the amount of the taxable gain. My guess is that 17 years of depreciation on the various properties could be $300K or more, which reduces the basis and increases the taxable gain upon sale.
Topic Author
Don46
Posts: 198
Joined: Sun Feb 24, 2013 5:53 pm

Re: Capital gains on Commercial Real Estate Query

Post by Don46 »

MarkNYC wrote:Not sure why you're ignoring depreciation in the calculation of adjusted basis, since it's a significant factor in the amount of the taxable gain. My guess is that 17 years of depreciation on the various properties could be $300K or more, which reduces the basis and increases the taxable gain upon sale.
I realize depreciation will have to be factored in, but I wanted to know how the loan was treated first. My CPA informs me depreciation amounts to only 100k, but that cannot be right.
At present I'm shopping around for an accountant who knows what he is doing when it comes to commercial real estate and I'm gathering all my records.
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