Did buyers do anything shady to back out of deal?

Q. A couple months ago, my husband and I sold our house and purchased another, contingent on our sale going through. Our buyers twice requested to extend their financing contingency and then ultimately sent us notice that they could not qualify for a loan and demanded their deposit back. This, of course, blew up our purchase, though no money was lost.

We were very suspicious about their inability to get a loan because all we heard from the beginning of this was how qualified they were, they were downsizing and they were putting up a large percentage, 30 percent, of the purchase price. We were told they were solid buyers. Both our attorney and real estate agent sympathized but told us this is fairly routine and we just need to move on.

We now have learned from our agent that these same buyers are buying another property for more money than what they were paying for our house. Supposedly, this new house is a great bargain. This, of course, makes us even more suspicious, as we now think they became aware of this new house and decided to cancel our deal.

Our buyers deposit has already been returned to them so I'm guessing there's not much we can do about all this, but we are not very happy and if there is anything worth pursuing in this, we might consider it. Your thoughts?

A. You would have had more leverage if the buyer's deposit was still with the listing agent, or whoever was holding the deposit. When contracts are terminated per the financing contingency, in most cases the lender's denial letter is sent along with the notice of termination. Often, the denial letter specifies the reason for the denial.

Most parties holding earnest money deposits (usually the listing agent) will not release the deposit absent direction from both seller and buyer. Without your direction to release the funds, the buyer's deposit would have been locked up with the listing agent until either the parties came to some resolution or a court order directed the release of the funds. You could have dug further into the reason for the denial. Plus, if they were anxious to pursue this new property, they may have agreed to pay you some or all of the deposit just so they could move on.

As it stands now, I would probably agree with your attorney and agent to let it go.

Q. I have owned a small house I have rented out for the past 20 years. I am now getting ready to sell it. It's worth about $100,000 more than what I paid for it and I was figuring I would have to pay about $15,000 in capital gains taxes. A friend of mine tells me he thinks I am way underestimating what I will owe. Any idea why he is saying that?

A. If you sell your investment property in 2019 and do not exchange the property pursuant to Section 1031 of the tax code, you will be subject to a capital gain tax ranging from 0 percent to 20 percent of the gain, depending on your income. What constitutes the gain appears to where you are missing something.

You are calculating your gain based upon the difference between the purchase and sale prices of the property. This would essentially be accurate (ignoring for the moment improvements made to the property) but for depreciation. You have most likely been depreciating a large percentage of the property over the past 20 years. I say large percentage because land is not depreciated.

So, if your tax preparer determined 20 years ago that the structure comprised 70 percent of the value of the property and the land 30 percent, 70 percent of the value (purchase price) has been used to calculate depreciation. Residential investment property is depreciated over 27.5 years, so in 20 years, you have depreciated approximately 74 percent of 70 percent (if that number was used) of the purchase price of the property.

The impact this has on your capital gain tax calculations is that your cost basis (essentially your purchase price) is reduced by the amount of depreciation you have taken over the 20 years. Your starting point isn't the purchase price, it's the purchase price less the depreciation you have taken.

I would suggest speaking to a tax professional. You may wish to consider a 1031 exchange, whereby you can exchange this property for a like kind property and, if done properly, will defer the capital gain tax and in certain circumstances, eliminate the tax altogether.

• Send your questions to attorney Tom Resnick, 345 N. Quentin Road, Palatine, IL 60067, by email to tom@thomasresnicklaw.com or call (847) 359-8983.