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Thumb of Michigan | Don't "have" to use anything really. My only point is that a 1031 buyer won't pay for example 25% more than what a property is worth just to save a 15% capitol gains tax bill. Makes no sense to do so. The 1031 buyer will have to somehow determine what the real value of the property to be purchased is. I'd use appraised value in conjunction with recent sale prices if available myself. No way would I ever want to show up at a land auction and decide that the purchase price will be $100 more than what the guy in the funny shirt will pay.
As far as what role the IRS has in the purchase price end of the formula- its a non issue. They don't care. Only thing they want to know is what the capital gain the seller of the subject property realized. They could care less that someone paid too much or too little money for it.
As far as the IRS goes, all they want to know from the 1031 person is what the purchase price of the property to be sold was, what the sale price is, the difference is the capitol gain subject to the 15% tax. That number is written in stone. The 1031 person can then defer that tax on the capitol gain by replacing the property with like kind property. If the replacement property has a total cost equal to or greater than the sold property, 100% of the gain can be deferred. Lets say for example the replacement property has a total value of only 80% of the sold property, where the seller takes 20% of the value of the sold property off the table and trades into a property using a 1031 on the balance (80%) of the proceeds. : the IRS will require a pro ration of the capitol gains tax. 20% of the tax liability will have to be paid now, 80% is deferred via the 1031 on the replacement property. At least, that's the way it was yesterday according to my CPA.
Edited by pat-michigan 12/5/2010 00:49
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Someone explain to me how a 1031 exchange is good for farmers...
