Land Sale & AMT - should have done a 1031!

[bearkeley]

Just found out that the advertised 15% cap gain for land sale doesn't apply if you're hitting the AMT after you add the cap gain to your other income....

Our gut told us to do a 1031, but decided to just take the cash since it was only 15% and invest it in stocks....it's been over 6 months and now we want to put the money (that has been sitting in ING) back into real estate...argh!!!

Worst part of it all, is that ALL of the Sched E deductions, etc. that I spent 16 hours to put together and enter into turbotax didn't even count!   I have been looking forward to the effects of passive loss caryovers from the rentals from 2004 too, but it's all useless 

Guess I'm just venting, but deep down, I'm really hoping one of you guys have a way to suggest how we can reduce our 2005 income to not hit the AMT 

 

[LOL!]

http://www.fairmark.com/amt/index.htm

is a good read on the AMT. But it's too late for your deep down desires.

 

[boont]

Just did a 1031 for the reasons you mention. In my case (Calif) the cap gains tax is not 15% but 24% when you include the state tax.

It was not difficult but it was a pain because of the time limits you must obey. You have 45 days to name the property you want. In a hot market that means it is hard to negotiate with a seller.

Got it done and then borrowed out a ton of money which is tax free. That part worked quite well.

boont

 

[mathjak107]

there really isnt to much you can do to avoid the amt on a large capital gain.just happened to us to..the worst part is all the state and local taxes we paid this year on the sale of some manhattan co-ops are causing rhe amt to trip for 2006 ..we are going to see maybe 5,000 dollars coming back from paying over 97,000 in state and local taxes for 2005.

 

[audreyh1]

I am sometimes kicked into AMT due to a large capital gain (pretty outrageous that!). But I'm thinking that I eventually get some of it back as a tax credit - in a later year when I don't happen to owe AMT.

Just be sure to fill out Form 8801 in subsequent years.

Sorry - I'm not a tax expert, and I don't remember all the details. I just know to fill out that form starting with the first year I pay AMT and carrying the credit forward as many years as I need to.

I'll know better when I fill out this year's and next year's taxes!

Audrey

 

[Martha]

Audrey, most of the time you won't get an AMT credit if the AMT resulted from LT capital gains. Those gains aren't considered timing items so no credit is available.

 

[audreyh1]

OK - I thought I had been able to use that in the past. I may have been confused because some of my AMT had been due to ISOs in the past, but I thought I had also recouped from years where I didn't have ISOs in the picture.

I just always make sure Turbotax fills out that form.

It's pretty outrageous that LT cap gains trigger AMT.

Audrey

 

[Martha]

It's pretty outrageous that LT cap gains trigger AMT.

Audrey

Nah, it is just a way to pretend tax rates are lower than what they really are.

 

[audreyh1]

Nah, it is just a way to pretend tax rates are lower than what they really are.   

That doesn't mean it's not outrageous! LT cap gains should be treated completely separately from other income.

If AMT was originally designed to keep someone from paying no taxes - well you are paying all your taxes on your LT cap gains, so why should it make you pay more on your other income?

Audrey

 

[mathjak107]

yep they gave us a 15% capital gains rate and took it back under the amt....that carry over credit is useless too in later years as it never seems to apply....the worst part is like i said above,after paying soooo much in state and local taxes this year for 2005 the deduction in 2006 will trigger the amt tax again........

 

[bearkeley]

carrying the credit forward as many years as I need to

Does this mean that the deductions I wasn't able to take this year (like rental property loss from last year and this year, for example) can be carried out to future years?

Thanks all for the response - I am glad that we weren't the only ones that fell into this trap situation. A day later, I'm realizing that the real issue I probably have was having to go thru calculating the deductions and not getting any credit for it after 16 hours of hard work. But....as my dear husband reminded me: "at least we're complaining that we're paying a lot of taxes because we actually had gains" - a friend of ours just found out that they will need to sell an investment property in Florida at a loss.... puts things in perspective, I guess....

 

[audreyh1]

I don't know about your specific case, but many losses can be carried forward if you aren't able to take advantage (or use all of it) in any given year. Programs like Turbotax are pretty good at tracking this stuff - but check what the program is doing to make sure.

Audrey

 

[tryan]

The 1031 exchange is good ... but my accountant is quick to remind me that the exchange DEFERs - vice exempt - taxation. We'll all pay the piper eventually - when the exchanged property is sold.

Only hope is to make the property the primary residence for 2 years ... then the tax is exempt.

 

[Arif]

but my accountant is quick to remind me that the exchange DEFERs - vice exempt - taxation. We'll all pay the piper eventually - when the exchanged property is sold.

If you will the property to your heirs they get a stepped up basis. So you might have to pay taxes but your heir might not. At least that is what I've been told.

Martha?

 

[Jane_Doe]

Oh, boy!

This really really screws us up big time! I thought all I had to figure when we sell our property is 15% LT cap gains plus state tax. We have been planning on selling a small "strip" center that we (DH) have built and owned/operated for about 15+ years. Real Estate prices have really skyrocketed in our area and commercial property in our location is at a premium, so we figured we are close to hitting it just right (still waiting on some local government decisions to be made regarding sewer prior to putting it on the market). I have been figuring we could sell as soon as this fall. I am so bummed out. Why do they tell you cap gains is 15% if it only counts for up to x$??

We really don't want to stay in RE! I don't want to do a 1031. I guess we could exchange/buy several single family homes and slowly sell them after first renting it out for the requisite years, and then living in it for 2 years to be able to have the exemption for it being our primary home, (again, and again) but I really really don't want to do that. This means if we decide to sell, we have to either sell it for more (wait longer) or bite the bullet and settle for a smaller lump sum left over to invest. I should have known it was too good to be true!

Does anyone know if the highest rate is 28% (plus state tax of course) and at what amount the highest rate kicks in at - I'd appreciate the info. I have already copied, printed and read most of the very informative webite from Fairmark.com that was referenced above (thanks LOL). Next I guess I'll read through the IRS AMT publication and see if I can make heads or tails of it. Also, I will install Turbo Tax on my computer and run the figues and see what it says. This is SO depressing! But, as Bearkley said above [paraphrased] there are a lot worse/more important things in this world than money matters!

I appreciate any feedback on my situation.

Help . . . . . . . . Jane

 

[mathjak107]

its hard to say what the amt trip points are this year as the standard deduction for amt which was increased over the years rolls back to lower levels unless the gov't raises it. for 2005 i belive by 220,00 or so all deductions are phased out and its a straight 28%...most of the time its 26% below that...our amt tax penalty ran an extra 14,000 this year on top of the regular taxes due... on a 650,000.00 capital gain...

 

[Martha]

Does anyone know if the highest rate is 28% (plus state tax of course) and at what amount the highest rate kicks in at - I'd appreciate the info. I have already copied, printed and read most of the very informative webite from Fairmark.com that was referenced above (thanks LOL). Next I guess I'll read through the IRS AMT publication and see if I can make heads or tails of it. Also, I will install Turbo Tax on my computer and run the figues and see what it says. This is SO depressing! But, as Bearkley said above [paraphrased] there are a lot worse/more important things in this world than money matters!

I appreciate any feedback on my situation.

Help . . . . . . . . Jane

Jane, here is a thread we had a while ago where we discussed AMT, possible calculators and problems with any of the calculators. http://early-retirement.org/forums/index.php?topic=4786.0

To quote myself:

Here are a couple of calculators but they require you do really be able to figure out what is income counted for AMT and what deductions are disallowed for AMT. The calculators do have links to that information:

http://1040tools.com/html/wc.dll?cptest1~calc~altmin2000~my
H&R Block 2006 AMT Estimator

The dinkytown website has nice tax calculators but even it won't touch AMT.

The AMT exemption for 2004 and 2005 is:
* $58,000 if married filing jointly or as a surviving spouse
* $40,250 if single or a head of household
* $29,000 if married filing separately

In 2004 and 2005, the available AMT exemption amounts are reduced by 25 cents of every dollar of the amount by which an individual's taxable income for AMT purposes (called AMTI) exceeds: $150,000 for joint filers and surviving spouses; $112,500 for single taxpayers; and $75,000 for a married couple filing seperate returns. The AMT exemption amounts are eliminated entirely if AMTI exceeds: $382,000 for joint filers (up from $346,000); $273,500 for single individuals and heads of households (up from $255,500); and $307,000 for married taxpayers filing separately (up from $271,000).

Good luck making your way through the mess.


Here is a decent web site that talks about AMT and has links to the tax form and instructions: Top Ten Things That Cause AMT Liability

We sold are individually owned real estate even though we knew we would end up paying some AMT. We did not have anything we wanted to do a 1031 into. The price was right. It was time to sell. We didn't think we needed to have the tax consequences drive what we really wanted to do.

 

[Martha]

If you will the property to your heirs they get a stepped up basis. So you might have to pay taxes but your heir might not. At least that is what I've been told.

Martha?

Yup. You can do 1031s forever. When you die, your heirs will get a stepped up basis and all those defered taxes never get paid. One reason why I support an estate tax.

 

[Jane_Doe]

Thanks so much, Queen Martha!! You're a real gem!!

Mathjak- thanks also for your input.
Now off to these sites to see what I can figure out. I guess after the "tax" season I will have to pick our accountant's brain on this if I haven't figured it out by then. (He's a peach!!-had to have one with having a business)

Well, off to the saltmines .......

One more quick(?) question:
For quick calculating purposes, I just take the lump sum of sales price (less commission or other stlmt costs) then I take out the Basis (less the depreciation), THEN I take that amount and WAS x 15% cap gains. NOW am x 28% (max. AMT) and then what's left is mine? is that basically correct (as a quickie)?

I can't figure out how MathJak got an extra 14,000 AMT when you take 650,000 x 28% (max. AMT rate) vs. 15% (cap gains rate) it should be 84,500 MORE in taxes - NO? I must have something wrong!?!?

I guess that wasn't really a QUICK question, was it?? :

BTW, I truly, truly appreciate all the help and time, info etc. It will help me to be able to sleep tonight!

Jane, the pain

 

[Martha]

You will pay at the 25% rate on the recapture of depreciation.

Your calculator won't work quite right because your AMT is going to apply to your non-capital gain income. The capital gain income simply serves to cut into your AMT exemption and expose more of your other income to tax. So, for example, last year we had considerable capital gain income from capital gains and about 25% of our income was from ordinary income sources. Our average federal tax rate turned out to be about 16.75%, and that is with paying some AMT.

EDIT: For very rough calculators, I suggest checking that thread I linked to above.

 

[Jane_Doe]

Ok, if I have this right:

Example:
Ordinary earned income:  65,000 X highest AMT rate

Long Term Cap Gains: 1,200,000 x 15% cap gains rate

is this correct - if so I can sleep like a baby 

if not .....

BTW I did try the calculators you linked and think they want the big money

Thanks a bunch,
Jane 

 

[mathjak107]

we were able to lower our taxes by filing married seperatley this year..since the capital gain was in my wifes name only on a business venture she is in it made sence.i realized if we filed jointly even my salary would be hit with the amt and since once you phase out all deductions married or single dosnt matter since amt is flat rate...so heres the actual numbers off my wifes 1040....she only works part time so her income is only around 15,000 or so.the rest is investments and the capital gain from the sale of the nyc co=ops....

total income 741,457
regular taxes 115,047
amt penealty adder 12,186
total taxes 127,233

the state and local was a killer and was another 77,000

 

[mathjak107]

long term capital gains it seems does get hit at less than 28% as it looks like overall just over a flat 17% if you take the taxes divided by the amount...of course if we filed jointly if the capital gain was in both our names it would be higher because then my entire salary would be amt penalized at the 28% since its not a long term gain

 

[mathjak107]

You will pay at the 25% rate on the recapture of depreciation. 

Your calculator won't work quite right because your AMT is going to apply to your non-capital gain income.  The capital gain income simply serves to cut into your AMT exemption and expose more of your other income to tax.  So, for example, last year we had considerable capital gain income from capital gains  and about 25% of our income was from ordinary income sources.  Our average federal tax rate turned out to be about 16.75%, and that is with paying some AMT. 

EDIT: For very rough calculators, I suggest checking that thread I linked to above.

not really the way it works or else our amt on her 15,000 earned income would be way less ...basically i think it comes down to the amt really being the phase out of the 58,000 or so amt deduction for a married couple so it adds 28% or so of the 58,000 deduction as it gets reduced by more income..our overall 17% from dollar one shows its not 28% across the board. on long term capital gains....it also is linked to deductions ...for 2006 the 77,000 we paid in state and local taxes will send us back on the amt again this year even with just regular income and no capital gains this year...on our 135,000 income our total deductions for 2006 would be about 97,000 on schedule a....our overall taxes would normally be about 3,000 if it wasnt for the amt...the amt brings us up to about 15,000 for 2006..

 

[Jane_Doe]

Thanks, MathJak!

Boy, this really is confusing! I haven't put Turbo Tax onto my computer yet (always afraid to add stuff - hate it when my computer crashes), but probably will today just to get a more acurate picture. I really appreciate having real numbers from you to give me a better idea how it really works. I think maybe it really may work out ok. I sure hope so! DH wants me to call our accountant today, but this is something that can wait until after the 17th - his office is always nuts this time of year and he always seems so tired!

Anyway, I will run the numbers (assuming the old computer will take the new program ...) and report back.

Thanks again - talk with you later!

Have a great day!

Jane