Capital Gains on land sale

[Bonnie]

Have had a question asked that I think I know the answer to but don't want to overlook something I may not be familiar with. And this is not a current customer. Taxpayer in past owned a Day Care and sold it and paid Capital Gains at that time. There was also additional land surrounding the Day Care that Taxpayer now is thinking about selling. The land is in an LLC. Taxpayer is also buying another business (unrelated to the Day Care), that will be in this same LLC. Question is if taxpayer sells the land and then uses that money towards purchase of new business can he avoid Capital Gains on the sale of the land. I appreciate any help as I'm not that familiar with this.

[Snaggletooth]

I don't think so

Bonnie, if these are two separate transactions, I don't see how capital gains can be avoided.

This is not to say the two transactions cannot be merged into some kind of deal by a lawyer and tax planner, but even then I don't know whether this could avoid capital gains. The "merge" would have to create some sort of attachment between the two transactions which may not exist.

[Gene V]

Bonnie,
You might look and see if the land and business qualify for like-kind property and do a 1031 exchange.

[Roland Slugg]

The gain on the sale of the land can be avoided ... well, deferred, actually ... ONLY by doing a properly structured and executed like-kind-exchange. LKEs are authorized by Code §1031.

In order for the gain on the sale of the land to be fully deferred, however, the full proceeds from the sale must be used to acquire more real estate ... land, building, or both ... that is then held for investment or used in a business, but not used for personal purposes. (If the replacement property is a house that's rented to tenants, but the owners want to move into that house themselves some day, they can do so after owing it for at least two years. And in order to sell that house and use the §121 exclusion of up to $500,000 of gain, they must own it for at least five years.)

A business is not "like-kind" property. If the owners of the land use some of the sale proceeds to acquire another business, the portion of those proceeds used to purchase that business or any of its assets will not qualify for LKE treatment.

There are "simultaneous" and "non-simultaneous" LKEs. A simultaneous LKE does not require the use of an independent qualified intermediary, known as a "QI." It's handled by the escrow company via a double escrow. A non-simultaneous LKE, however, does require the use of a QI to handle the exchange paperwork and hold the funds from the time the relinquished property is sold until the replacement property is acquired. There are also strict time limits regarding (1) the identification and (2) the acquisition of replacement property in a non-simultaneous LKE.

Finally, if you have never been involved in a LKE before, I urge you to educate yourself about them before you advise others. You would even be well-advised to consider letting an experienced tax adviser handle this for you and your client (or prospective client), or at least work with an experienced person on a consulting basis. The most important person to bring into a possible LKE early-on is the QI. There are companies that specialize in that very process, and they all have a web site, so they're easy to find.