Help with Capital Gains Tax?

[Knoell Palmer]

Hey everyone. I kinda have an interesting situation and I'm hoping to get your help. Parents got divorced and in the divorce decree, I was to be gifted a multifamily. The multifamily has been in my Dad's name since the divorce 10 years ago and now we are in the process of selling it. When the sale goes through, I will get any and all profits from the sale. To my understanding, there is a way to "avoid" capital gains tax if I put that money into another property (planning on occupying this property). What exactly does that entail? Does the money have to go towards improvements. Can it go towards the down payment and/or mortgage? Does 100% of this capital gain have to go in the house for it to be valid? Thanks in advance for the clarification!

[David M.]

@Knoell Palmer

The divorce was 10 years ago?  The property is still in your Dad's name?  So, the gift has yet to happen?  Was this part of the divorce decree?  That its stays in your father's name, but the proceeds are gifted to you?  The specifics of the decree and the execution, or lack of, is very important here.  With the property being in your father's name, he would be liable for the taxes in my layman's point of view from what little i"ve read.

As mentioned, you need to figure out the cost basis for the property.  Roughly, the purchase price plus any capital improvements.  The sales price less the cost basis is the capital gain.

Its a multifamily so I am guessing its a safe bet that the other units were rented?  Then, there will be depreciation recapture.  The IRS requires that depreciation be taken.  However, there is no free lunch so you are taxed at 25% on the depreciation taken.

Those two liabilities can be DEFERRED with a 1031 like-kind exchange only for an investment property. This all needs to be setup in advance of the sale of the property.  The entire amount of the sale and any cash proceeds need to be exchanged into another investment property.  But, this would have to be an investment property, and it needs to stay with the same owner (basically).  So, if Title is in your father's name, the exchange would have to be done in your father's, not yours --- which doesn't sound like would follow the decree.

Are you already investing in real estate?  Is this a good rental?  Otherwise, just take the proceeds and pay the tax.  You are making money if you are paying taxes.

You've got a lot going on here.  Happy to chat.  Good luck.