Maximize Your Tax Savings When You Sell Your Horse Property

By Steven W. Hickox, Attorney

Many people reside on the same property where they conduct their horse business.

Even though it is one parcel of real estate, it is being used for two purposes.

Therefore, when it is time to sell the property two different Internal Revenue Code (IRC) sections can be used to maximize income tax savings.

While many people consider their home (principal residence) to be an investment, the IRS does not. Instead, the IRS draws a distinction between real estate held for investment and real estate held as principal residence.

The tax treatment of this characterization is very different.

Generally, investments can be exchanged under IRC section 1031 while principal residences can be sold under IRC section 121 without current tax liability on either.

When a property that has been used for both residence and business is sold, both code sections may apply to the transac-tion.

In this case, a percentage allo-cation of value is made to each use of the property.

For example, 40 percent of the value can be assigned to the residence portion of the property and 60% of the value can be assigned to the business portion of the property.

The apportionment of value must have a reasonable justification.

After apportionment of value, gain is calculated for each portion. If depreciation has been taken, it must be assigned to the business portion.

On the principal residence portion, the first $500K of gain is not taxed for married couples ($250K for singles).

On the business portion, income tax liability is deferred if the rules of section 1031 are followed.

This will mean buying new investment property with the proceeds.

Other rules and deadlines apply. With the right tax planning, no income tax needs to be paid on the transaction.

However, the rules must be strictly fol-lowed to qualify. More information can be found at: http://www.1031x.com or call 888-899-1031.