Pond Boss Forums INTRO Questions & Observations When it comes time to sell...

I think a "Section 1231" property relates to business properties, but allows owners to turn the income from a sale into capital gains (that is taxed at a lower rate).

It sounds like Eastland may have been talking about a Section 1031 "exchange property"? In that case, when you have a large expected capital gain from the sale of your property, you are allowed to reinvest your "profit" into a different property. There are very specific rules to follow when doing this type of exchange, but it is another way to avoid a large capital gains taxable event.

I am certainly not an expert on that topic, but I have some wealthy buddies that have used that option to a substantial benefit.


Eastland, if that is what you meant, and you have better advice than I do, perhaps you could expand on how it worked out for one of your exchanges?

When we built this place in '07 Boone Electric was giving something like 800' of buried electric per installed meter base.
With a meter on the house and one on the barn there was no up-front cost to bringing in the power.
Be worth a phone call to your co-op to find out if they do the same.

Definitely. Check out your options.

When we got our farm, putting a 200 amp service in would have cost money. But a 400 amp service was free. I already had a main switch box rated for 400 amps, so we got a 400 amp service.

Totally agree with Augie about the phone call.

We do not have electricity (or a house) at our property. I enquired with our co-op about their rules. They would give us the first 500' for free if we had X amount of kW-h of usage per year. (Usage rate was average for a small home, not onerous at all.) The rest of the run would be on our nickel at a pretty high price, but copper prices are still outrageous, so I can't blame them.

If you really wanted to get creative, you might enquire about making a hookup to back-feed energy to the grid when your cabin has excess solar (or wind) generation. If you put in $10,000 for solar panels, but saved $10,000 on your grid connection, you would own a valuable asset at a net zero out-of-pocket cost.

Under "normal" conditions, it is hard to get a positive ROI in solar panel installations, but if you got some subsidies on the panels, and some consideration from the co-op on the long hook-up, maybe you come out ahead AND have stand-alone power at your cabin in times of grid disaster!

I was typing while Theo was also typing about creative solutions!

Theo, that is an excellent example of the impeccable logic of government regulated accounting!

Would they have paid you some cash money if you had installed an 800 amp service?

Thanks for cleaning up my mess FishinRod, I was talking abount a 1031 exchange.

Another situation. I started collecting coins over 65 years ago. BTW, I’m now 80. I’ve never bought a coin. But, when the government decided to quit making pure silver dimes, quarters, halves and dollars in 1964, I started saving them. I actually started going to the bank and buying rolls of those coins; mostly dimes and quarters. After awhile, it didn’t make much sense to search or even look at my change. Almost no silver in circulation. At this time silver coins are worth about 16.5 to 17 times face value for the silver content alone.

I have Whitman coin folders about 10 inches tall and a heckuva lot of rolls of silver dimes and quarters. Also some relatively rare coins. Those rolls could, and probably do, have scarce or rare coins that are worth more than silver value.

What to do. Sell them? How do you put a price on them without exhaustive research that I’m not inclined to do?

BTW, We are debt free and all of our day to day needs are met by Social Security.

Sorry to hear about your surgery. When it comes to capital gains tax, generally, the purchase price and significant property improvements count toward the cost basis. Furnishings, satellite TV, and fish feeding costs usually don't.

Thanks, Nina. I guess the key is determining what is a "significant" improvement!

Dave: I'd pass those coins down to kids, grandkids, etc. that seem to have a genuine interest in collecting and won't just chuck them into a vending machine for a candy bar.

If you can afford it, keeping property in the family helps create a legacy and base.

Both of my parents have died. Grew up on family farm. Several siblings. Some of the land was sold. None of siblings now farm. We cash rent it all out. I wish my young son could experience growing up farming; but it is a big gamble. My wife and I make good money; but each of our jobs are also very demanding. Not much spare time to farm or trach prices and concern about the risk. I regret not trying to buy more of the land that was sold; but also need to ensure can make payments.

Ranger, I’ve always believed in real estate. The migration to Texas has put our real estate out of reach.

We bought our home about 30 years ago. I couldn’t afford it now.

When my grandparents died, I bought their house, a 3-1.5-1 brick home from my mom, at market value, a long time back. I wanted to keep it for sentimental reasons. It’s now worth about 4 or more times what I paid for it. My grandson and his wife are living in it and paying about 1/3 what it would cost if they were paying market value, about $1,600 per month, in a one bedroom apartment.

My rural 133 acres of junk land that I bought for $455 per acre would now go for over $10,000 per acre. And, it’s nothing but trees, hills, poison oak and rocks. It has no practical value but people moving from California are looking for what I have. Not for sale. It’s my sanity place.

Guv, I'd keep $330K worth of 'sanity' and sell the remaining 100 acres!!!


Just kidding......maybe.....

Dave, I've only owned my place for nine years, but apparently the value has gone up sharply. Hope a Californian ambles by with too much money burning a hole in their pocket! (Or, thinking of my good neighbors, a Texan.)

If a Californian buys it, remind them that they are a refugee, not an advocate.

When I bought, I could only see a small part of it. There was no road and it was solid oaks and cedars. Got a dozer in and built a road, approx 1 mile, suitable for a pickup, to the back. Now, the road has washed out and it’s really rocky. Can only get to the back by 4 wheeler or tractor. Dozer operators don’t want to put their tracks on rocks so not much way to fix it.

I had the land in front of the house selectively cleared, drilled a well and bought a used, white trash, trailer house. Sewer system was added.

I took my grandfather to see it after I had the road dozed. He was a cotton farmer from North Texas. He said “Well, I’ve finally found it.” I asked what he had found. He said “When the good Lord built the earth, He had one handful of crap that He didn’t know what to do with. Damn boy, you came along and bought it.”. Yep it grows nothing but oaks, rocks, cedars, hogs, deer, rattlesnakes, copperheads and grandkids.

Recently added a 3 station, 100 yard, shooting range with additional stations at 25 and 50 yards.

My kind of place.

Fortunately, the great California exodus comprises mostly sensible middle class & small business owners. The very rich can afford the prices, including gated communities & private security. The poor get big time benefits, so they tend to stay. Day by day, California becomes more third world, with a small wealthy class, not much middle class, and large number of indigents. Refugees are usually solid folks.

Our old friend and member JHAP (late of Sandy Eggo, as he would say) is, I am certain, a worthy addition to Texas.

Ahhh... something I may be of help with!

I'm a CPA

IRS Publication 551 is what you want to look through for what you can use to increase the "basis" of your property. You'd be looking at purchase price plus the items listed in 551 in capital improvements. A capital improvement is an addition or alteration to your property that increases its value, prolongs its useful life, or adapts it to new uses. I know this is pretty gray for a personal property.

I think the biggest barrier is your burden of proof for the capital improvements that you have made. If you do not have evidence of those, you wouldn't stand a chance under audit. I would heavily investigate all of the items you have that were significant improvements to the property and compare that to what you could prove you spent on them. Ultimately if you sell, you'll have to make a risk-based decision on how much you add of those improvements. I think using the fish, fish food would be futile in an audit, but like I said, this all comes back to your risk appetite.

I'd suggest either a 1031 exchange for an income producing rental property (this was mentioned earlier as a way to defer the tax), or do an installment sale. If you sell it via an installment sale, you will only realize capital gains as the proceeds are received each year. Capital gains rates are attractive if you have low income. For instance, if you are married, if you have combined income less than approximately $90,000 your cap gains rate is 0%. All depends on your situation, but an installment sale may be a good approach. A good CPA and good attorney could step you through setting that up well.

tyler,

Could he actually "finance" the sale?

The buyer is probably looking at crappy interest rates on his property loan (if he needs financing). If the seller (anthropic) is willing to take X% interest and finance the sale, would that meet the accounting requirements you have outlined above? (Or would the interest turn part of the cash flow stream back into "income" for tax purposes?)

I have seen moderately wealthy farmers around me offer financing to the buyers when they are selling 5-10 acre lots for rural homes and their target buyers are young couples (that typically do not have a lot of free cash or great credit scores).

[Just thinking out loud since we have yet another thread with a subject matter expert.]

I'm in your debt for sharing your expertise, Tyler. Hopefully you won't charge interest!

Seriously, your post really helps me to think more clearly about the situation. Looks like the property will be listed very soon, so I need to establish a cost that is totally backed up with proof. Someone close to me went through a terrible time when her husband died and the IRS audited her. Unbeknown to her, her husband ventured aggressively into too many gray areas, so the IRS went after her hammer & tongs while she was still grieving. I don't want my wonderful wife to go through an IRS audit and have to defend the cost basis of the property without having all the backup proof. I'm quite mortal, so don't want gray areas that could get my very non-financial oriented wife audited & abused!

Also thinking about this stuff and appreciate the financial expertise/experience.

Bottom line is that I paid $43,560 for the 133 acres, 40 or so years ago, that realtors tell me is worth 8 to 10 k per acre. Somewhere around a million bucks. Improvements are dozer to cut a 1 mile road from the front to the back, a water well, the pond, and a 2 bedroom poor white trash trailer house. Rocky and hilly so is considered recreational property which really means junk land.

Add a shipping container, construction office trailer, one stock pen and tractor shades that I built.

John Deere and 8N Ford tractors, various farm implements, 3 trailer’s, and 2 Honda 4wheelers.

Nothing depreciated and I expect a significant financial hickey.

Since this has been over a 40 year span, I wouldn’t have a clue where the receipts are. Some of them were “lost” in a divorce.

All in my name since I’m on my second (and damn sure last) wife.

I hear you, Dave. My wife is irreplaceable, has stuck with me through thick & thin, and there's been a ton of thin this year. Maybe 2024 will be better, hoping to have a great Alaska fishing trip with folks I love.

Tyler, Here's what I think fit the definition of "an addition or alteration to your property that increases its value, prolongs its useful life, or adapts it to new uses."

Purchase price of property (obviously)
Building dam for main lake
Initial fish stocking (?)
Standpipe, if not included in dam bill
Building small forage pond, including water valve that connects it with main lake
Roads, including road to forage pond & bridge over creek
Gravel roads leading to fish feeders
Rocks for boat launch site (otherwise tend to be too shallow & muddy to launch)
Controlled burn to help timber grow (we have a timber tax exemption so are in the business)
Cement parking space next to home
Artificial structures placed in the lake (?)
Front gate
Irrigation system for front lawn (a necessity in summer!)
Original landscaping, including flagstone walkway to dock (otherwise incredibly muddy trek when it rains)
Replacement of dead flowers & bushes
Riprap on dam to stop erosion, if not already covered in dam building payment
Riprap on drainage ditch to lake, otherwise rapid erosion after every rain
4 bedroom, 3 bath double wide manufactured home (?)
Wooden porch for home
Building home pad with right soils & height so it never floods
Electrical connection to home (?)
Water line to home (?)
Septic tank
Purchase & planting of aquatic plants best suited for bass (?)
Construction of cement spillway to keep excess water & mud from hill away from home
Riprap covering emergency spillway

That's all I can think of right now. One last query: Are these costs indexed for inflation, or will I end up paying capital gains tax on illusory profits?

Yes owner financing is quite popular with farmers. My grandmother just did this with her grandson on a land sale. Land contract was setup, and the way the taxes work is the total gain is realized for tax purposes over the period of the land contract. In that case it was 5 years and we were able to avoid capital gains as her income was low enough.

That being said, a good attorney is needed for a land contract as you want protections for default and other items. But it’s a valid way of stretching the gain over time and reducing the overall tax burden if it helps fall in a lower bracket as capital gains is progressive similar to traditional income tax.

Evidence of cost is the tricky part, thankfully capital gains is a more attractive rate vs regular income tax. (Max is 20%)

What are the plans for the proceeds? Can they be placed in another investment that could produce other tax benefits such as other real estate ?