Q. My father recently passed, and my siblings and I sold his house and split the profits according to his will. What would be the best way to keep from paying taxes on this gain? It's approximately $14,000. If I put it in a Roth IRA or regular IRA, would that shield me from the tax burden? Please give me some advice on what to do with this money so it's not so devastating when tax time comes.
Here's some good news: It's likely that you don't owe any taxes on this inheritance. When you inherit property, you inherit the property at its value at the time the person died. Generally, if you sell it within a year of the owner's death, the IRS views the property's value as of the day of death as the same as the day it sells. Because real estate can be hard to value, the amount received at the sale of the property if it was close to the person's date of death would be viewed as the value of the property at the time of the death.
Since the sales price should be considered the market value on the date of death, you shouldn't owe any taxes on the sale.
To recap, if your father purchased his home for $50,000 ten years ago and recently died, and you and your siblings sold the home for $200,000, then you and your siblings would not have to pay any taxes on the sale of the home.
But, let's say that you kept the property for five years after his death, and then you sold it for $100,000 more than the value on the date of death. In this case, you'd owe long-term capital gains taxes plus state taxes on the sale. Typically, you'd owe 15 percent in capital gains taxes plus state tax, and there could be additional taxes owed on the sale if the property was used as an investment property.
Finally, if there is tax to be paid when you sell real estate, you won't be able to avoid paying the taxes on the sale of the real estate by putting the proceeds from the sale into an IRA or other retirement account.
For more details, please consult with your accountant or tax preparer.
Q. We bought an investment property in California and used a 1031 exchange company. Today we found out that the company is closed for business. We would like to know what we should do now.
I'm so sorry. There have been a number of cases recently reported where the owners of 1031 exchange companies have either used investors' funds for personal use or absconded with the money or invested it poorly and lost it.
You should contact the California Department of Real Estate and the California Attorney General's office to see what they are doing with this company and to let them know you are an injured party.
To avoid the possible loss of all of your funds, you should contact an attorney in California immediately. That attorney may advise you to sue the 1031 company as soon as possible.
The reason you need to move quickly is that, under the IRS rules, if you don't complete your exchange within the required timeline, even if the company has not released the funds, you'll owe taxes on your 1031 exchange. To avoid that double-whammy, you need to see what you can do from the California end to protect your funds, if possible.
Your accountant or tax advisor can advise you further.