QUESTION: my father sold some land in 2006 for quite a profit, unfortunatly he did not plan ahead on the sale, he sold the land for a lump sum payment of $365,000, he purshased it for $104,000 & had the land for 4 years before selling, he had to borrow money (which he borrowed against his primary residence) to pay the land off before the final sale in the amount of $85,000 along with fees in the amount of $6,000 for borrowing the money. After the sale he paid the loan off & put the rest in cd's, he is over 65 & is normally in an under $20,000 tax bracket, does he have to pay capital gains on the entire difference in the purchase & sale price or can he deduct the amount of the loan with the interest he had to pay, also is there any way to deduct the amount he reinvested in the cd's? (the cd's are 1 year cd's). Also can he defer any amount of the tax due untill next year or later, Any help is appreciated as I am the one who does his taxes & honeslty have
no idea, I think I !
know the answer but just want to be sure.
Thanks ahead for any help
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david ingram replies:
The following comes from my August 1994 newsletter in the top left hand box at www.centa,com
Examples of Increases to Basis (Additions to cost price):
* An addition to the property (new room, lift and put a basement underneath).
* Replacing an entire roof.
* Paving a driveway, or building a driveway, or an approach bridge or culvert.
* Installing central air conditioning.
* Legal fees and closing costs to purchase property.
* Survey costs, fencing, digging or drilling a well.
* Installing septic tank or alternative energy source.
* Rewiring building, replumbing entire building.
* Assessments for local improvements: water connections, sidewalks, roads.
* Casualty Losses - restoring damaged property.
* Interest and taxes not used as a deduction in other years (US only).
Examples of Decreases to Basis:
* Exclusion from income of subsidies for energy conservation measures.
* Insurance reimbursements.B
* Casualty or theft loss deductions.
* Easements (amount received for granting an easement).
* Credit for qualified electric vehicles, (amount of the credit).
* Gain from sale of old home on which tax was postponed (family residence only).
* Residential Energy Credit: Amount of the credit if the cost of the energy item was previously added to the basis.
* Section 179 Deduction.
* Deduction for clean-fuel vehicles and clean-fuel vehicle refuelling property.
* Depreciation: The greater of the depreciation deduction which decreased your tax liability for any year or the deduction you could have claimed under the depreciation method selected.
* Corporate distributions: Non-taxable amount.
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Putting the money into CD's does not create a tax deduction or shelter or deferral
The following is a direct copy from IRS Publication 551 - http://www.irs.gov/publications/p551/ar02.html#d0e820
You can also find more in Chapter 8 of Publication 535 - http://www.irs.gov/publications/p535/ar02.html#d0e820
Adjusted Basis
Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. The result of these adjustments to the basis is the adjusted basis.
Increases to Basis
Increase the basis of any property by all items properly added to a capital account. These include the cost of any improvements having a useful life of more than 1 year.
Rehabilitation expenses also increase basis. However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. If you have to recapture any of the credit, increase your basis by the recaptured amount.
If you make additions or improvements to business property, keep separate accounts for them. Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. For more information, see Publication 946.
The following items increase the basis of property.
The cost of extending utility service lines to the property.
*
Impact fees.
*
Legal fees, such as the cost of defending and perfecting title.
*
Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements.
*
Zoning costs.
*
The capitalized value of a redeemable ground rent.
*
Assessments for
Local Improvements
Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. Do not deduct them as taxes. However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements.
Example.
Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. Add the assessment to your property's basis. In this example, the assessment is a depreciable asset.
Deducting vs. Capitalizing Costs
Do not add to your basis costs you can deduct as current expenses. For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. However, you can choose either to deduct or to capitalize certain other costs. If you capitalize these costs, include them in your basis. If you deduct them, do not include them in your basis. (See Uniform Capitalization Rules, earlier.)
The costs you can choose to deduct or to capitalize include the following.
Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules.
*
Research and experimentation costs.
*
Intangible drilling and development costs for oil, gas, and geothermal wells.
*
Exploration costs for new mineral deposits.
*
Mining development costs for a new mineral deposit.
*
Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical.
*
Cost of removing architectural and transportation barriers to people with disabilities and the elderly. If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit.
*
For more information about deducting or capitalizing costs, see chapter 8 in Publication 535.
Table 1. Examples of Increases and Decreases to Basis
Increases to Basis Decreases to Basis
Capital improvements:
Putting an addition on your home
Replacing an entire roof
Paving your driveway
Installing central air conditioning
Rewiring your home Exclusion from income of subsidies for energy conservation measures
Casualty or theft loss deductions and insurance reimbursements
Credit for qualified electric vehicles
Assessments for local improvements:
Water connections
Sidewalks
Roads Section 179 deduction
Deduction for clean-fuel vehicles and clean-fuel vehicle refueling property
Casualty losses:
Restoring damaged property Depreciation
Nontaxable corporate distributions
Legal fees:
Cost of defending and perfecting a title
Zoning costs
Table 1. Examples of Increases and Decreases to Basis
Increases to Basis Decreases to Basis
Capital improvements:
Putting an addition on your home
Replacing an entire roof
Paving your driveway
Installing central air conditioning
Rewiring your home Exclusion from income of subsidies for energy conservation measures
Casualty or theft loss deductions and insurance reimbursements
Credit for qualified electric vehicles
Assessments for local improvements:
Water connections
Sidewalks
Roads Section 179 deduction
Deduction for clean-fuel vehicles and clean-fuel vehicle refueling property
Casualty losses:
Restoring damaged property Depreciation
Nontaxable corporate distributions
Legal fees:
Cost of defending and perfecting a title
Zoning costs
Decreases to Basis
The following items reduce the basis of property.
Section 179 deduction.
*
Deduction for clean-fuel vehicles and refueling property.
*
Nontaxable corporate distributions.
*
Deductions previously allowed (or allowable) for amortization, depreciation, and depletion.
*
Exclusion of subsidies for energy conservation measures.
*
Credit for qualified electric vehicles.
*
Postponed gain from sale of home.
*
Investment credit (part or all) taken.
*
Casualty and theft losses and insurance reimbursements.
*
Certain canceled debt excluded from income.
*
Rebates from a manufacturer or seller.
*
Easements.
*
Gas-guzzler tax.
*
Tax credit or refund for buying a diesel-powered highway vehicle.
*
Adoption tax benefits.
*
Credit for employer-provided child care.
*
Some of these items are discussed next.
Casualties and Thefts
If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance.
You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. To make this determination, compare the repaired property to the property before the casualty. For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts.
Easements
The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. It reduces the basis of the affected part of the property. If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain.
