I’ve had two knowledgeable CPA’s tell me two different thing.
I have a condo I lived in 12 years ago for awhile, then moved to a house and rented the condo. On my taxes, I took depreciation over the years.
A couple of years ago, I bought some farm land and I cash rent the land for crops.
I sold the condo in march and payed off a chunk of the land mortgage with the proceeds. One of the CPA’s tells me I screwed up and should have put the proceeds from the condo in an escrow account, never actually taking possession of it, and then apply that money to the land mortgage…avoiding the capital gains tax on the condo sale.
Another CPA tells me that this concept of applying the money for an ‘in kind’ property, only works if you haven’t bought the property already. In other words, I couldn’t avoid the taxes anyway, because I had already purchased the land earlier. It would have worked if I put the money in escrow and subsequently purchased a new rental property, but couldn’t use it to pay off a property I already purchased.
Any idea of who is correct? I personally would like CPA #2 to be correct, because I don’t want to think that I screwed up and could have avoided the taxes legally. It hurts less if I know I couldn’t have avoided them.
First a little lecture: People come to tax professionals at the end of the year after engaging in some taxable transaction thinking they can perform some tax sleight of hand and save them gobs of money. Usually at that point, all the tax pro can do is tell you how to report the transaction on your tax return. If the client had come to ask for advice BEFORE entering into the transaction, there might have been some tricks that they could have given you to save money. But once you’ve completed the transaction, your fate is written in stone.
Lecture over.
There are a lot of special provisions for farms and farmers and I am not familiar with any of them, so this is based on the assumption that there is no special farm-related provision.
Your accountants are talking about doing what is called a Section 1031 exchange. Normally you either have to trade one property for another or use a qualified intermediary to locate a replacement property within 45 days of the sale and complete its acquisition with 180 days after the sale.
There is also what is known as a reverse exchange. To execute a reverse exchange, you have to have a qualified intermediary obtain the replacement property no more than 180 days before the sale and then use the proceeds from the sale toward purchasing the replacement property (without taking personal control of the sale proceeds).
Remember that the tax on the sale is only deferred until you sell the replacement property.
So, if you knew you were going to buy the farm and sell the rental, there are things you could have done. But you needed to make your plans before you bought or sold either property.
So based on the fact that I purchased the farm a year and 4 months prior to the condo sale, I could NOT have set up the 1031 exchange when I sold the condo. Is this what you are saying? Therefore CPA 2 is correct. Is that your contention?