Long term capital gain avoidance without 1031?

[Chris Brackenbury]

Hi all,

I am selling a ranch that was used as a rental held tenants in common and have very little basis since it was inherited long ago. I would like to reinvest all the proceeds (375k) into a local flip (owning second mortgage note) and somehow avoid the brutal tax bill of 89k. Any ideas?

[Dave Foster]

@Chris Brackenbury, Well, your post says without a 1031 but that is the easiest way to accomplish exactly what your are trying to do.  Maybe the key lies in the fact that you do not have to 1031 the entire amount.  You mention that this inherited land is held as tenants in common.  Since that is the case, each of the tenants can make their own decision on whether to take cash and accept tax liability for their % of the sale, or to do their own exchange with their % or to combine with each other.

The problem is if you already own that second property and are wanting to pay down debt.  That won't work.  You also will not be accomplishing anything if you don't intend to hold that second property for a while.

If there is no debt on the property now then you could take those proceeds and using a 1031, buy a cash flow property of some type that is also attractive to borrow against.  Then immediately after purchasing it and concluding the exchange you could put financing on it and take the cash to use for the flip you describe.  

By doing it that way you save the tax bill, accomplish your flip, and the cash flow from the new property pays the debt service on the cash you want to use.