Real Estate taxes

Fritz Maurer

Well-known Member
Had to sell off some land that was part of a family trust, to get the delinquent taxes under control. There is a guy telling me to make sure the buyer pays off the tax bill,instead of giving the money to us, or else it will be subject to capital gains tax. 90% of the money will finish off the tax debt, and the balance to be disbursed in closing costs, etc. Is this guy correct? How can it be considered a taxable sale if someone pays your taxes, and you give him some land in return? Thanks, Fritz
 
Your gain will be difference of what the ground was appraised at the time of the trust being set up and what the price is when sold. Here in central IL in the last 10 years, ground has appreciated $10k. So if this trust was set up here in 03 and sold now, you have a $10k gain. I would suggest to take the money and pay the taxes yourself. If the buyer did not pay the taxes you would be SOL big time! Best to check with an accountant or tax lawyer as the laws are always changing. Also the buyer of the taxes will have to be paid. I have seen that interest from 0 to 18%. Good luck, I am sure someone will try to pick the bones.
 
Around here the taxes have to be paid before title can be transfered. Usually handled at closing by the title company.
 
SOP is for the title company, attorney or whoever is handling the closing to deduct the taxes from the proceeds and pay them.

HOWEVER, that doesn't mean that the real estate taxes are deducted from your capital gains. You still have to report the actual sales price. But taxes you pay are still deductible from income. Note that it's advantageous to deduct real estate taxes from regular income than from long-term capital gails, since capital gains tax is capped at 15 percent.
 
It makes zero difference how you received the payment. You still will incur capitol gains if the land is selling for more than it was valued when it transfered into the trust. It will be figured on a per acre basis. So if ten acres sold and covered $10,000 of taxes and it was valued at $2500 when it went into the trust, there would be income of $7500 that would be subject to capitol gains. The form of payment makes no difference. You still received $10,000 of benefit. The biggest part just went to pay delinquent taxes.

Think about it this way. You are selling the land for the amount of the taxes plus some closing fees. This is still income. It just is being diverted to pay the taxes on the whole property.

Before this deal closes you need to talk to a tax person in your location. You may sell the property and have the taxes paid but then own the IRS the capitol gains tax.

I saw this happen to guys in the 1980s. They went broke. They gave the farm back to the bank. The bank took the ground back for the amount owed on it. The guys did not file bankruptcy. The IRS considered it sale with the bank being a buy with the purchase amount/price being the loan payoff amount.

Here is how they incurred a tax bill. They originally bought the ground for lets say $1000. The land increased in value but they did not sell it they used the addition value as collateral at the bank. The bank loaned them money based on this increased value. So let that value be $2000. The farmer spent the money on whatever and then could not make his payments. So the bank took the farm back. In the IRS's eyes the bank paid $2000 for the land. The farmer owed capitol gains on the $1000 increase in the land value.

Two different guy I know had to declare bankruptcy after they voluntarily signed their farms back to the bank because of tax issues. One was hit with a $350,000 tax bill on the capitol gains and the write off FHA did that was counted as income as well.
 
Without a doubt, best to talk to an attorney who deals in real estate transfers.

My unexpert opinion: It depends on how honest you are.

If the buyer paid your taxes for you first, then bought your land for the difference later - you'd still "legally" have to pay taxes on that pay-off amount, at least as a "gift". But there's really no reporting to the IRS so, it's all about what you tell them...

So yes, your capital gain would be reduced by the tax amount.

BUT the buyer would be foolish to do this for many reasons. First and foremost, he'd be foolish to trust somebody to follow up with a reduced sale after paying their taxes for them. And I don't think too many attorney's would eager to write up a legally binding contract for such a tax-scamming deal.

Next, the buyer would be foolish to do this because he'd be ensuring he pays inflated capital gains if he ever sells the land.

Just to use round numbers, say the buyer pays off 40,000 in taxes - then pays you 60,000 for a 100,000 property.

Hard times hit the buyer and he has to sell the property for a loss - say 90,000

He'd STILL have to pay taxes on 30,000 in capital gains.

Even if he sold it for a profit, he'd have to pay taxes on that additional 40,000 of capital gain.

I just don't see any upside to the buyer.

You could discount the price... but that kinda defeats the whole purpose of trying to get tricky in the first place.
 
As an Attorney and past Realtor I can ONLY speak as to how its handled in our state. Here the real estate taxes are "typically" handled/paid at closing of the transaction, at least all current and possibly those due in the immediate future. A "Warranty Deed" guarantees the title to be free and clear of liens and encumbrances, so if Title Insurance is involved you can be sure all bills and taxes (unless exempted) are likely current. Regarding which party pays which portion, that depends upon the purchase agreement and they may be pro rated (to actual date of transfer) or depending on when last paid and when due again, the sales contract may state something like Seller is responsible for the Spring/Fall installment of 2012 taxes due and payable in May/November of 2013 and Buyer is responsible for all afterwards.. With that information (and other such as fees and closing costs and title insurance etc etc) in hand the closing agent can pay all bills and distribute funds. The capital gains is a function of the "base" versus the net sales price AFTER expenses.

As to most legal or tax related questions I must advise in good faith that you consult a local competent trained professional (Real Estate Attorney or CPA) experienced in the laws of your state before you act. Bad advice could cost you big bucks when the IRS audits grrrrrrrrrrrr lol its not worth it to take a chance in my opinion but its your money and your decision as to how to handle the tax issue...

Best wishes and God Bless

John T Country Lawyer
 
I agree with what John T posted below about the taxes being paid as part of the process of transfering a clear title - similar to selling a house that has a mortage on it - the mortgage holder gets paid before (or at the same time as) the seller.

The trust's gain on the property has nothing to do with how the funds are distributed from the sale. If the sales price is more than your basis you owe capital gains taxes.

If I buy a land for $100,000 and then borrow another $50,000 against it and later sell it for $140,000 I owe capital gains on the $40,000. The fact that I have am $10,000 short in paying off the loans means nothing.
 
The external_linkcare tax became effect January 1st. It applies only if your AGI is over $200K for individuals, $250K for couples.
 
Rereading your post I am assuming that the delinquent taxes that the trust is paying will also be on property that is not being sold?

If that is the case it still doesn't matter how the proceeds from the sale are paid. If the sales price is more than the basis you owe capital gains. The fact that the money went directly from the buyer to creditors instead of from the buyer to the seller then to the creditors doesn't matter. The only way you beat the capital gains is through a like kind exchange.
 
I agree with what the others said- capital gains on your profit on the sale, and what you do with the money is your business. But mutual gifts (he gifts you the payment of property taxes, you gift him a discount on sale price) are taxable the same as outright sales, with the added feature that you'll attract the attention of several taxing agencies if you try to put through a sale with an artificially low price. Part of this comes from your friendly Department of Revenue, which collects a transaction tax on sales- they are very active in auditing anything suspicious, and have some hefty fines and penalties if they catch you. Plus, they notify IRS of any monkey business they find, and the nightmare continues.

Its not worth it. Do an arms-length transaction, pay the capital gains, and move on. Confine your creative transaction skills to stuff where there is no paper trail.
 
OK, so just for the sake of discussion you sell some real property that has outstanding taxes on it. You make the deal for say $10K above the tax bill. The buyer hands you $10K, and you go your separate ways. You potentially have a capital gains issue, if the buyer doesn"t pay the taxes on the land, the taxing authority eventually has a tax lein sale on the property. That was how it was explained to me when I sold a mobile home on a piece of land in Decatur co Ia. The buyer in my case didn"t pay the taxes, never even recorded the transaction as far as I could tell. When Decatur co tracked me down and asked me to pay the taxes I said have a tax sale, I have no interest in the property anymore. I never heard anything out of them after that...
 
(quoted from post at 19:55:22 03/21/13) OK, so just for the sake of discussion you sell some real property that has outstanding taxes on it. You make the deal for say $10K above the tax bill. The buyer hands you $10K, and you go your separate ways. You potentially have a capital gains issue, if the buyer doesn"t pay the taxes on the land, the taxing authority eventually has a tax lein sale on the property. That was how it was explained to me when I sold a mobile home on a piece of land in Decatur co Ia. The buyer in my case didn"t pay the taxes, never even recorded the transaction as far as I could tell. When Decatur co tracked me down and asked me to pay the taxes I said have a tax sale, I have no interest in the property anymore. I never heard anything out of them after that...

Brian that "Tax Sale" would count just as bad as a foreclosure on your credit rating.
 
I'm confused, what does adjusted gross income have to do with a sales tax on real estate?

Is there a place online so I can read up on it?
 
Its the latest trend on "spreading the wealth around"- certain tax items don't "kick in" unless your income is above a certain level (or conversely, you are exempt if your income is below a certain level). Next phase is capping deductions if your income is above a certain level. Reducing a deduction results in the same bottom line for IRS as does imposing a tax, and its a whole lot easier to sell to the public.
 

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