Selling a home with zero profit doesn't mean zero capital gains

I was sent an email today from Julie Tumbaga of Orexco 1031 Exchange. It was a good reminder for me that many sellers in this difficult market are selling with no profit, however, many taxpayers do not understand is that property may be sold with no profit can be subject to significant taxable capital gain.

How is it possible simply because gain results not just from appreciation in value, but also results from depreciation deductions taken during ownership of the property, gain deferred from previous transactions, and from borrowing against appreciated equity in a declining market. These adverse tax consequences can be avoided by engaging in 1031 tax deferred exchange.

How to determine gain is the sales price less adjusted basis=taxable gain.

Here are three situations resulting in no profit, but taxable gain

1. Depreciation Recapture: If a taxpayer takes depreciation deductions, those deductions reduce the taxpayer's basis, thereby resulting in gain.

2. Carryover Gain: If a taxpayer sells property previously acquired in an exchange at no profit or even at a loss the taxpayer may still be faced with significant taxable gain.

3. Excess Borrowing: If a taxpayer borrows against appreciated equity in their property, tax consequences can also result if the property thereafter declines in value and the taxpayer is forced to sell the property for little or no profit.

Before selling in a down market, taxpayers and their advisors should first determine the taxpayer's basis in the property to be disposed of and thoroughly discuss upfront the potential tax consequences. Taxpayers can avoid any of the tax consequences noted in their example by engaging in a IRC 1031 tax deferred exchange.

So thank you Juilie! This came at the perfect time! Not only to share with others but specifically this one client of mine who I had advised to speak to a CPA and they were not interested!

If you want more information on 1031 exchanges let me know and I can have Julie contact you!