If you are selling property and involved in a 1031 exchange, you certainly want to know what your deferred tax liability is. The important thing to remember is that you are taxed on your gain, NOT on your profit and NOT on your equity. In other words, you can sell your property, have no profit and no equity, and still be subject to tax liability under the 1031 rules because there is a gain. How can you calculate what you might owe? Well, see an accountant. But if you're stubborn and you refuse to go to your accountant, here's a little formula that will point you in the right direction:
First of all, you need to calculate your Adjusted Basis. To do this, take your original purchase price, and then add the cost of your improvements (assuming you have not already claimed them as expenses). Then subtract any depreciation you have already taken, and you have arrived at your Adjusted Basis.
Next, subtract your Adjusted Basis from your current sales price. Then subtract your closing costs (i.e. title fees, real estate commissions, etc.). The number you end up with is your Total Gain on Sale.
Finally, take your Total Gain on Sale and make the following three calculations: 1) Multiply your Total Gain by the state capital gain tax rate; 2) Multiply your Total Gain by the federal capital gain tax rate; and 3) Multiply your Total Gain by the federal 25% tax rate. The sum of these three numbers is the approximate amount of taxes that you can defer through a 1031 exchange. There may be some additional deduction for state taxes.
I strongly recommend that before entering into a 1031 transaction, you speak to your accountant and make sure you understand the pros and cons of the 1031 exchange, and that you are clear about how much tax you are deferring! For more information on 1031 exchanges in general, please see here.
Sunday, August 24, 2008
Thursday, August 14, 2008
Tax Increases on Second Homes and Investment Properties
Up until now, if you sold your principal residence, you could pocket up to $250,000 in profit, tax-free (or $500,000 if you are married filing taxes jointly) as long as you were living in it for at least two of the last five years. In other words, if you owned rental or investment property and you moved in and used the property as your principal residence for at least two of the last five years, you could receive substantial profits tax-free upon the sale of the property. You could sell your home and move into your vacation property or rental unit for just two years, and still avoid paying capital gains tax.
Well, lawmakers have finally caught on. If you plan to buy, sell or live in an investment or rental property that you own after January 1, 2009, you will still be able to receive some of the profit from the sale of your rental or investment property tax-free, but not all of it.
The new tax scheme involves prorating the profit between the time you rented the property and the time you lived in it. If you rented out your property for a year (non-qualified usage, in IRS jargon), and then lived in it for three years (qualifed usage), and made $200,000 profit when you sold it, then 1/4 of your profit is subject to capital gains tax, and 3/4 is not. Anyone buying investment property that they intend to reside in for any period of time should speak with their accountant or tax professional immediately to see how these new rules will impact them!
Well, lawmakers have finally caught on. If you plan to buy, sell or live in an investment or rental property that you own after January 1, 2009, you will still be able to receive some of the profit from the sale of your rental or investment property tax-free, but not all of it.
The new tax scheme involves prorating the profit between the time you rented the property and the time you lived in it. If you rented out your property for a year (non-qualified usage, in IRS jargon), and then lived in it for three years (qualifed usage), and made $200,000 profit when you sold it, then 1/4 of your profit is subject to capital gains tax, and 3/4 is not. Anyone buying investment property that they intend to reside in for any period of time should speak with their accountant or tax professional immediately to see how these new rules will impact them!
Friday, August 8, 2008
Land Trust Basics
Periodically I come across a client who is interested in a land trust, but doesn't know all that much about it. Well, here you go, land trusts in a nutshell:
Land trusts are a fancy way to hold title to real estate; instead of holding title in your own name or in the name of your company, you can hold title in a land trust. There are basically two types of land trusts: 1) Land trusts that are administered by a bank (typically for an annual fee of a few hundred dollars) and 2) Land trusts that you can administer yourself, with the help of an attorney who can set it up for you.
There are a number of advantages to having a land trust:
1) Land trusts can be useful estate planning tools, especially for smaller estates.
2) Land trusts allow the transfer of property quickly upon your death. The property can be transferred to your heirs per the terms of your land trust immediately without having to go to court.
3) Land trusts avoid probate -- not for your estate in general, but at least with respect to the property held in the land trust. If you have a relatively small estate which is tranferred through joint tenancies or payable on death accounts, then you can simply put your house in a land trust, and your heirs can avoid the entire probate process in court.
4) Land trusts are relatively inexpensive.
5) If you purchase property and put it directly in a land trust, without ever having owned it in your own name, your nosy friends and neighbors will not be able to figure out what you own by searching your name in public records databases.
Of course, land trusts have their disadvantages too:
1) Land trusts are poor estate planning tools for large or complex estates, unless they are simply a small component of a larger, more comprehensive estate plan.
2) Land trusts are a poor estate planning tool when the beneficiaries of a particular piece of land are likely to squabble or have disputes. The trustee of a land trust has very little discretionary authority when compared to the trustee of your average living trust, making such disputes more difficult to resolve.
3) Land trusts should not be used when leaving real estate to minors.
4) While land trusts are relatively inexpensive, there is some cost involved. If you set up your land trust through your bank, you will have to pay an annual fee. If you hire an attorney to set it up, you will have to pay to draft the land trust.
If you are not sure whether a land trust is the right option for you, contact your attorney for his or her opinion. A professional familiar with real estate and estate planning should be able to guide you properly.
Land trusts are a fancy way to hold title to real estate; instead of holding title in your own name or in the name of your company, you can hold title in a land trust. There are basically two types of land trusts: 1) Land trusts that are administered by a bank (typically for an annual fee of a few hundred dollars) and 2) Land trusts that you can administer yourself, with the help of an attorney who can set it up for you.
There are a number of advantages to having a land trust:
1) Land trusts can be useful estate planning tools, especially for smaller estates.
2) Land trusts allow the transfer of property quickly upon your death. The property can be transferred to your heirs per the terms of your land trust immediately without having to go to court.
3) Land trusts avoid probate -- not for your estate in general, but at least with respect to the property held in the land trust. If you have a relatively small estate which is tranferred through joint tenancies or payable on death accounts, then you can simply put your house in a land trust, and your heirs can avoid the entire probate process in court.
4) Land trusts are relatively inexpensive.
5) If you purchase property and put it directly in a land trust, without ever having owned it in your own name, your nosy friends and neighbors will not be able to figure out what you own by searching your name in public records databases.
Of course, land trusts have their disadvantages too:
1) Land trusts are poor estate planning tools for large or complex estates, unless they are simply a small component of a larger, more comprehensive estate plan.
2) Land trusts are a poor estate planning tool when the beneficiaries of a particular piece of land are likely to squabble or have disputes. The trustee of a land trust has very little discretionary authority when compared to the trustee of your average living trust, making such disputes more difficult to resolve.
3) Land trusts should not be used when leaving real estate to minors.
4) While land trusts are relatively inexpensive, there is some cost involved. If you set up your land trust through your bank, you will have to pay an annual fee. If you hire an attorney to set it up, you will have to pay to draft the land trust.
If you are not sure whether a land trust is the right option for you, contact your attorney for his or her opinion. A professional familiar with real estate and estate planning should be able to guide you properly.
Sunday, August 3, 2008
Home Purchase Tax Credit for Buyers!
Congress passed a new bill last week, and if you're buying a home and meet all of the following requirements, you're in for a sweet deal:
1) You don't own a home now, and have not owned a home in the last three years;
2) You closed on the home you're buying after April 9, 2008, or, if you haven't closed yet, you will close before June 30, 2009;
3) You are a U.S. Citizen or resident alien;
4) You did not finance the property using a tax-exempt bond mortgage; and
5) You are using the property you are buying as your primary residence.
If you meet all of these requirements, you can can claim a credit of up to 10 percent of your purchase price, up to $3,750 (or up to $7,500, if you are married filing taxes jointly), on your 2008 or 2009 taxes. If your adjusted gross income is over $75,000 (or $150,000 for married couples), then this tax credit begins to phase out.
There is a catch, however. You do need to repay the tax credit starting in the second tax year after you bought your home, making pro-rata repayments for up to 15 years. But the payments are not that much: for example, if you were eligible for the full $7500 credit, you would pay $500 a year for 15 years. That's basically an interest-free loan! Moreover, if you sell the home at no profit, you don't have to pay the balance you owe from the proceeds you get from the sale.
So if you're looking to buy and meet all of the above requirements, get a move on! You can buy any home you want -- house, condominium, townhouse, new, old, even if it's falling apart and you need to fix it up yourself. It's not often the government gives out interest-free loans!
1) You don't own a home now, and have not owned a home in the last three years;
2) You closed on the home you're buying after April 9, 2008, or, if you haven't closed yet, you will close before June 30, 2009;
3) You are a U.S. Citizen or resident alien;
4) You did not finance the property using a tax-exempt bond mortgage; and
5) You are using the property you are buying as your primary residence.
If you meet all of these requirements, you can can claim a credit of up to 10 percent of your purchase price, up to $3,750 (or up to $7,500, if you are married filing taxes jointly), on your 2008 or 2009 taxes. If your adjusted gross income is over $75,000 (or $150,000 for married couples), then this tax credit begins to phase out.
There is a catch, however. You do need to repay the tax credit starting in the second tax year after you bought your home, making pro-rata repayments for up to 15 years. But the payments are not that much: for example, if you were eligible for the full $7500 credit, you would pay $500 a year for 15 years. That's basically an interest-free loan! Moreover, if you sell the home at no profit, you don't have to pay the balance you owe from the proceeds you get from the sale.
So if you're looking to buy and meet all of the above requirements, get a move on! You can buy any home you want -- house, condominium, townhouse, new, old, even if it's falling apart and you need to fix it up yourself. It's not often the government gives out interest-free loans!
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