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Author: CUBE2U2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121061  
Subject: S.O.S. MOTLEY FOOL STAFF Date: 12/26/2004 10:15 AM
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BIG QUESTION:

I will do my best to describe this in as few a words as possible.

Wife and I - inherited 80 acres, built house on 2 acres for cost of about $280,000

80 acres was given to us over a 4 year period as a gift equalling $160,000. (Tax exempted because $20,000 given to spouse and $20,000 given to me each year - $40,000 per year for 4 years)

Question: How to dodge taxes on gains if property sold.

New appraised property value: $10,000 / acre -
but given to us at a value of $2,000 / acre
Difference of $8,000 per acre if sold - (We would have to pay taxes on this $8,000 right?)

How can we dodge paying these taxes?

An idea:

Could house be used as a leverage? In other words, if we have lived in the house for 2 years could we sell house along with so many extra acres of land (that could be further subdivided by purchaser) but included in house sell to allow upto $500,000 gain for spouse and me but pay no capital gains? (ps: We don't want to sell our house. Is there a way to do it on paper somehow to dodge taxes, and then get it back in a completely legal manner?

Or is there another way to sell the property without selling our house to avoid capital gains?

sincerey,

Struggling Fool




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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74928 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/26/2004 12:23 PM
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BIG QUESTION:

I will do my best to describe this in as few a words as possible.

Wife and I - inherited 80 acres, built house on 2 acres for cost of about $280,000

80 acres was given to us over a 4 year period as a gift equalling $160,000. (Tax exempted because $20,000 given to spouse and $20,000 given to me each year - $40,000 per year for 4 years)


First question...did you INHERIT this land or did you receive it as a GIFT? The difference between these two is paramount to the answer. If you inherited it (that is, you received it upon someone's death), you would use the assessed valuation as of the date of death as your starting cost basis. If, as you seem to indicate, it was received as a gift, your starting cost basis is the cost basis of the person who gave you the gift, not the value on the date your received the gift. This is probably NOT $2000 per acre but an even smaller value.

Question: How to dodge taxes on gains if property sold.

Generally you can't.

New appraised property value: $10,000 / acre -
but given to us at a value of $2,000 / acre
Difference of $8,000 per acre if sold - (We would have to pay taxes on this $8,000 right?)


Wrong. You would have to pay taxes on the difference between $10,000 and the actual cost basis (not the value) of the person who gave you the property.

How can we dodge paying these taxes?

Generally, you can't.

An idea:

Could house be used as a leverage? In other words, if we have lived in the house for 2 years could we sell house along with so many extra acres of land (that could be further subdivided by purchaser) but included in house sell to allow upto $500,000 gain for spouse and me but pay no capital gains? (ps: We don't want to sell our house. Is there a way to do it on paper somehow to dodge taxes, and then get it back in a completely legal manner?


Cost of house will add to your basis in the property. If you sell the entire property (or a portion of the property including the house) you can exclude up to $500K of gain on that portion of the property sold if you've owned and lived in the house for at least 2 years.

Or is there another way to sell the property without selling our house to avoid capital gains?

Stop complaining. If you sell 79 acres at $10K/acre (keeping 1 acre around the house), the most you will be paying in taxes is $118,500 on sales proceeds of $790K. You should be grateful to the person who was so generous in the first place.

Ira



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Author: TheBadger Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74929 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/26/2004 12:30 PM
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Ira:

Not to pick; but if the land was inherited; wouldn't their basis in the land be the market value on the date of inheritance; not the assessed valuation?

TheBadger


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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74930 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/26/2004 12:41 PM
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Not to pick; but if the land was inherited; wouldn't their basis in the land be the market value on the date of inheritance; not the assessed valuation?

Absolutely. Maybe I read the post wrong. I assumed the number quoted was the market value at the time the property was transferred.

Ira


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Author: CUBE2U2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74950 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 8:45 AM
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good question,

I'm sorry, let me clarify

large acreage caries a lesser value per acre as opposed to selling by the acre. The resale value of $10,000 is just a "guesstimate". There has been a real building boom in the last year in this area and as a result the land has gone up in value.(Just for the sake of math, i just came up with $10,000. Sorry for any confusion.) The land has gone up in value & to what extent time will tell. This is a good thing, but from a tax point of view is there a way to reduce the tax on profit.

I am still interested in some advice by Motley Staff. It is definately an interesting scenario is it not?.

Sincerely,

A Fellow Fool.

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Author: CUBE2U2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74951 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 9:25 AM
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Thank you for your response,

You did an excelent job of paraphrasing everything I typed followed with your opinion, right up to the point of ASSUMING i am complaining.

What is your basis for your assumption. You didn't paraphrase at the point of this accusation. You seemed somewhat knowledgable, but very unpleasant in your response.

The only reason the question was asked was to help gain knowlegde and insight for myself as well as for other Fellow Fools. This is the Financial Planning Board, is it not?

And the comment about being grateful to the person who gave the gift, I couldn't agree more. But I was offended that you left out God. Jesus is my Lord and Savior, and all Gifts come through him.

I couldn't help but to take your post a little personal. But if thats how you feel, thats how you feel.

Sincerely

The Fool


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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74954 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 11:05 AM
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CUBE2U2,

1. First of all, you should know that there really is no Motley Fool Staff to speak of. Most of the people on this board are simply interested in taxes and related issues. A few are CPAs, many are tax preparers, and some (like me) are well-informed (mostly) and well-intentioned (mostly) amateurs. Tax groupies, if you will. (Ok, truth-in-lending time: a few of the regular posters, e.g. the amazing TMFPmarti, are associated with The Motley Fool in some mysterious, otherworldly way.)

2. Re your taking a previous answer personally, you really shouldn't. The issue was your wanting to avoid capital gains tax, as much as possible, on what looked to be a fairly large transaction. You'd be positively amazed at how many people come to this board and say, "I'm looking at a capital gain of $100,000, but I don't want to pay any taxes. What can I do?" Frequently, the answer is, "Nothing. Pay the taxes, and be glad that you have a nice capital gain." That's more or less what happened in your case.

Lorenzo

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Author: makasha Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74961 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 12:44 PM
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And the comment about being grateful to the person who gave the gift, I couldn't agree more. But I was offended that you left out God. Jesus is my Lord and Savior, and all Gifts come through him.

Don't take the posts personally is my first piece of advice. My second piece of advice, if you want to avoid paying the taxes on the increase in value of the land, at $10,000/acre, gift approximately one acre per year for you and one for your wife to your church. In 30 years or so, you won't have anything left but the land your house sits on, and you won't have paid a dime in capital gains. Maybe you can even have written off the charitable contribution and gotten yourself some tax savings, though that sounds slightly off to me.

Kasha <---lurker on Atheist Fools board and I couldn't help myself ;-)

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Author: gurdison Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74962 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 1:51 PM
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<This is the Financial Planning Board, is it not?>

No, it is not. It is the Tax Strategies board.

<Jesus is my Lord and Savior, and all Gifts come through him.>


That may be true, but if they are gifts of a large enough monetary value, the IRS will have to give their approval before it becomes official from a tax POV.<g>

Incidentally, it does not matter to me what preference (if any) one has when it comes to religious matters. It is really irrelevant to the topics normally discussed on this board unless one wants to know how a charitable contribution is treated tax wise. FWIW, there are plenty of other Fool boards where the subject is discussed regularly (too regularly in some cases). There are even boards strictly devoted to the subject. So, if it is something you hunger to talk about, there are plenty of other places for you to do so.

One thing that did throw me is your combination of a high moral tone followed by a question you asked twice in your original post: "How to dodge taxes on gains if property sold?...How can we dodge paying these taxes?" The word dodge in a tax sense has a very clear meaning to those who post here regularly. It is not a positive one in any way. I take it as a "how can I cheat, lie or maneuver my way out of paying any taxes on this big windfall that befell me?" I am somewhat surprised that the responses were as nice as they were.

As Lorenzo pointed out this board (and every Fool board) is populated by people interested in the board subject. There are some Fool employees who float around from board to board, but they do not control the subject matter or debate. Some like our own Phil Marti have an interest in a particular board which matches both their interest and expertise. Phil was a former employee of the IRS, so he has a block of knowledge and experience that most of the rest of us do not have. We have all learned a lot from him over the years. We also have a number of CPA's or other professional people who offer their views along with the caveat that any actions you take are strictly your own responsibility.

All responses are made with the hope that they can help the wider population who visit here in addition to the specific poster. Sometimes the lessons are a good example of what not to do. Not everyone likes the responses they get because it may not be what they want to hear. Still, I have found that an honestly asked question will get a number of well reasoned responses. Often since taxes can be very complicated, the response may include links to other sites that you will have to sift through to find your applicable information. One bit of advice that applies to anyone looking to get some answers is to provide enough relevant information for the board to be able to help you. Without enough specifics, those responding are forced to make some assumptions that may or may not be correct.


B


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Author: CUBE2U2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74974 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 8:39 PM
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Thanks for your rational and neutral response, Lorenzo.

How did you like the idea of avoiding some of the taxes by selling house along with some of the property to allow for a tax defferal of up to $500,000?

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74976 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 8:41 PM
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CUBE2U2: "Large acreage caries a lesser value per acre as opposed to selling by the acre. The resale value of $10,000 is just a "guesstimate". There has been a real building boom in the last year in this area and as a result the land has gone up in value. (Just for the sake of math, I just came up with $10,000. Sorry for any confusion.) The land has gone up in value & to what extent time will tell. This is a good thing, but from a tax point of view is there a way to reduce the tax on profit."

Ira has already given you a good response.

And while there is size discount, I tend to doubt that it is as large or as readily available to you as you think.

There are costs to subdividing land and providing infrastructure - roads, water, sewer, and other utilities, that the developer pays and must recover in its lot sale price; you appear to be ignoring these costs altogher.

If you were to start selling 1-acre or smaller lots, you will run smack dab into ILSA (The Interstate Land Sales Full Disclosure Act (Title 15, United States Code, Sections 1701-1720)), which is no place to play without either some experience or some very good advisors.

See e.g., http://www.hud.gov/offices/hsg/sfh/ils/ilsdevqa.cfm ;
http://www.hud.gov/offices/hsg/sfh/ils/ilsstat.cfm ;
http://www.hud.gov/offices/hsg/sfh/ils/ilshome.cfm ;
http://consumerlawpage.com/brochure/62.shtml ;
http://www.usps.com/websites/depart/inspect/real-est.htm ;
http://static.highbeam.com/f/floridabarjournal/february011999/theinterstatelandsalesfulldisclosureactstwoyearcom/ ;
California - http://www.dre.ca.gov/forms/re614d.pdf .

Regards, JAFO


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Author: CUBE2U2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74978 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 9:09 PM
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gurdison,

somehow your post does not surprise me, especially when you make reference to no religious preference.

good day.


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Author: CUBE2U2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74979 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 9:10 PM
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JAFO,

I couldn't agree more.

good info,

Thanks

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Author: 3muttsmom Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74982 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 9:23 PM
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somehow your post does not surprise me, especially when you make reference to no religious preference.

You know, I have no dog in this fight, but just a suggestion.

Insulting those you have asked for help is not usually a winning strategy.

3MM

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Author: CUBE2U2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74984 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 9:29 PM
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3MM

thanks for the support,

I couldn't agree more with you about his insults and you are right it is tempting not to want to help him.



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Author: lorenzo2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74990 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 10:55 PM
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How did you like the idea of avoiding some of the taxes by selling house along with some of the property to allow for a tax defferal of up to $500,000?

If you and your spouse own and live in the house for the next two years, then yes, you can exclude (not defer) up to $500K of capital gain on the sale of the house and a reasonable amount of land surrounding it. I'm no expert here, but I'm almost certain I've read that if you sell a house and a large piece of land, you divide the sale up into two pieces: a big chunk of land (on which capital gains will be due in full) and a modest chunk of land around the house (which would qualify for the $500K exclusion). And no, I don't know what modest means - maybe an acre or two? But didn't you say, in the original post, that you wanted to keep the house?

Lorenzo

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Author: irasmilo Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 74993 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/27/2004 11:28 PM
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How did you like the idea of avoiding some of the taxes by selling house along with some of the property to allow for a tax defferal of up to $500,000?

If you and your spouse own and live in the house for the next two years, then yes, you can exclude (not defer) up to $500K of capital gain on the sale of the house and a reasonable amount of land surrounding it. I'm no expert here, but I'm almost certain I've read that if you sell a house and a large piece of land, you divide the sale up into two pieces: a big chunk of land (on which capital gains will be due in full) and a modest chunk of land around the house (which would qualify for the $500K exclusion). And no, I don't know what modest means - maybe an acre or two? But didn't you say, in the original post, that you wanted to keep the house?


I would argue that they have to wait for two years after the date of the first 1/4-interest gift (two years ownership) and also have two years of residence (perhaps including periods before gifts began) before they can get the 500K exclusion. It doesn't have to be two years from "today". They would only have to divide the sale if they sell the property in multiple transactions. If they do divide the property, they will have to find a reasonable method for allocating basis to the parcels. Capital gains on the vacant parcels will not qualify for exclusion, the gain on the parcel with the house will qualify. They can't allocate cost basis in a fashion which leaves all the gain on the parcel with the house. Finally, any series of transactions which end with the OP still in possession of the house would likely be thrown out by the IRS as attempted tax evasion (this term NOT used in a legal sense).

Ira



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Author: galagan Big gold star, 5000 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75008 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/28/2004 10:41 AM
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large acreage caries a lesser value per acre as opposed to selling by the acre.

Good advice from everybody, but let me throw in one more thing.

I've seen farmers with large amounts of land who sought to subdivide and sell lots. They have received advice from CPAs to the effect that if they do so and sell a sufficient number of lots, they technically become treated as real estate developers in the business of selling land, which turns their farmland into inventory and turns what would have been capital gains into ordinary income. This is an extremely bad result for most people.

The advice in one particular case was that the number of transactions that would get someone in trouble could be as few as four or five.

I didn't independently verify, so take it for what it's worth.

good luck,
dan

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Author: Foolferlove Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75010 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/28/2004 11:16 AM
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gurdison,

somehow your post does not surprise me, especially when you make reference to no religious preference.

good day.


Wow. Did you really just say what I think you said? Holy Moly.

Somehow your bigoted comment doesn't surprise me, especially when you make reference to YOUR religious preference.

FFL

(my apologies for continuing non-Tax-related discussion on this board, and my apologies to people of all religious beliefs for responding to a stupid comment with an equally bigoted one)

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Author: kh Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75011 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/28/2004 12:14 PM
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This is the Financial Planning Board, is it not?

No. It's a political one.

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Author: CUBE2U2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75056 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/29/2004 5:26 PM
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Thanks for the advice Dan.

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Author: CUBE2U2 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75058 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/29/2004 6:44 PM
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My apologies to you Ira. I must have misunderstood the following statement you made:

"Stop complaining". If you sell 79 acres at $10K/acre (keeping 1 acre around the house), the most you will be paying in taxes is $118,500 on sales proceeds of $790K. "You should be grateful" to the person who was so generous in the first place.

Ira

I interpreted it to mean that you were saying I wasn't apreciative, but I feel i am. And when i give thanks for something i give thanks to God. I happen to be a Christian, so i give thanks to Jesus Christ my Lord and Savior. I slipped up, because i shared this in anger, and of course the bible teaches not to use the Lords name in vain. I was guilty of that and worthily put in my place by the Foolish community. And as for one's religious beliefs, i agree this board is not intended for that purpose. But when asked about being appreciative in the statement of "You should be grateful" to the person who was so generous in the first place, I couldn't agree more. But i also thank my Lord and Savior Jesus Christ and hope that someday i use this blessing to the benefit of others, a lot better than i have on this board.

i have learned a lot in last few days. what started out in anger for me, then turned to a touch of humor, has ended with some better understanding for me personally. Thanks for the comments, both the good and the bad - or as one Fool described "the comments we didn't want to hear but none the less need to be spoken."



Sincerly,

CUBE2U2




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Author: kh Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 75067 of 121061
Subject: Re: S.O.S. MOTLEY FOOL STAFF Date: 12/30/2004 1:06 AM
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Cube,

Regarding your first post in this thread, I don't think you have anything to apologize about at all.

Fortunately, you did get a few thoughtful replies from experienced professionals who have the good sense to overlook a few carelessly-chosen words and understand that your question is legit and will be of interest to many taxpayers who seek to avoid taxes on real estate transactions in, as you plainly state, a completely legal manner.

As sometimes happens, some board members have chimed in with statements and opinions that only occasionally address the question at hand. These posts are from unlicensed amateurs or from people with an agenda. To be sure, it is annoying to see lots of recs given to replies like these. But I take some comfort in knowing that in the real world, there is a good way to deal with this nonsense. I know if my CPA responded to questions concerning ways to reduce my tax bill by laying a bunch of tripe on me such as “stop complaining” and “just be grateful for your gains,” I would fire him on the spot.

kh


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