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Q. What are the basic Rules of Thumb for exchanging?
A. The accounting for an exchange can be complicated, but three simple rules
of thumb can be helpful:
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- You should exchange for a property with an equal or higher price.
- You should have as much, or more, debt in the property you acquire as in
the property you give up.
- You should take no cash out of the transaction.
Thus, if you sell a property for $100,000.00 on which you have a mortgage of
$65,000.00, you should generally acquire a property worth at least $100,000.00,
with debt of at least $65,000.00 and you should take out no cash. You could
acquire another property for $100,000.00 with another mortgage of $65,000.00.
You could acquire a property for $200,000.00 with a mortgage of anywhere between
$65,000.00 and $165,000.00.
You would pay capital gains tax, however, if you acquired a property for
$100,000.00 with a mortgage of $90,000.00, because you would be taking out cash
of $25,000.00 after paying the original mortgage.
These simple rules of thumb can be helpful, but you should consult with a tax
professional before performing your exchange. Get sound advice from a licensed
professional!
Rice & Stallknecht, P.C. would be honored to
assist you.
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