There’s a great way for you to defer capital gains taxes on your investment/commercial property called a 1031 Exchange. According to Frank Marino of Sun Coast Real Estate, the 1031 “allows taxpayers to exchange real property held for investment or used in their business for new “like-kind” property, while deferring recognition of any capital gains.”
Our own business has seen a huge rise in investors who are interested in Denver real estate given the fact that it is a confirmed buyer’s market. If you’re in the market for a piece of investment property and would be interested in more information on 1031 Exchanges, give us a call and we’ll be happy to help.
The best way to play the Capital Gains Game is to use 1031 exchanges, but as this article describes, “It’s a tedious process and not many people know how to work the deal.”
Defer’Em is one of the best resources I’ve found for being able to understand all the confusion about boot, taxable gain, deferred gain, and new cost basis. It has a tool you can use to generate IRS Form 8824 for reporting Like-Kind Exchanges on your tax return, and a guided approach that helps you optimize deferrals using all deductible closing costs and exchange fees. It also generates an Exchange Report which will help you visually understand all the elements of your exchange. You can play with the numbers and get familiar with
different exchange scenarios, so even if it’s going to be a while before you do a 1031, you can always plan ahead.
I came across Depreciate’Em.com when I read this Forbes Article, which said “if you have an investment property, take it like a sponge and squeeze it!” The article was about how small-time landlords can avoid missing out on major tax savings; like Robert Kelley, who saved $6,000 in taxes due to depreciation alone.
It just goes to show that many people lose out on major tax savings, simply because they don’t know the rules about rental property, or they are unaware of resources available to them. I was happy to find resources like these because it makes it easier for my clients to learn and take advantage of tax-saving opportunities. Some people have a lot of difficulty understanding depreciation and 1031 exchanges, and I have even more difficulty explaining it to them, but
tools like these make it very simple for anyone to do.
Be sure to try out the apps and let me know what you think.
A couple things people should know about 1031 exchanges:
1. If you have the correct language in a sales agreement, if the 1031 exchange fails (largely due to the replacement property going away), these safeguards can redirect the money to another third party that can redirect the investments and defer your capital gains. It is a true Safetynet.
2. There are alternatives to 1031 exchanges. People are still stuck in the thinking that the only way to defer capital gains tax is to do a 1031 exchange. That is NOT true. There are multiple alternatives that provide greater flexibility, more liquidity, and better tax planning. As 10,000 baby boomers turn 60 each day for the next twenty years, you can bet that these exit strategies that enhance safe, reliable streams of income will continue and prosper. To learn more, visit http://www.virtuositypro.com
Mark,
Thanks for the comment. Could you give an example of one of the alternatives to 1031s?
Thanks very much,
bob
When you are truly ready to exit out of your real estate, one of the most common ways to defer capital gains is to do an installment sale (seller financing). This way you pay your capital gains tax only on that portion you receive in a given year. Why is that so much better? Call your CPA and ask them if they would prefer to offset $300,000 in capital gains in one year or $30,000 over the next ten years. The answer is obvious. With installment sales, and proper tax planning, you can potentially offset the annual $30,000 in capital gains taxes with other losses. Something to consider with your CPA’s help. I do this frequently for my clients.
However, there are many risks and disadvantages with an installment sale. First, the possibility of default and taking the property back and secondly, the needs of the seller may not match the ability of the buyer to perform. Lets say the seller wants regular monthly payments but also balloon payments in the 3rd, 5th, and 6th years for a college fund for their grandchildren. A buyer may have a difficult time doing that.
The solution MAY be a structured sale. Simply, the buyer pays the entire sales price at closing either with cash or by obtaining financing (usually 70%-80%). At the time of closing the money is transfered to a third party (just like a 1031 exchange) and the obligation of the specific terms dictated by the seller are assumed by a domestic insurance company like Prudential or Allstate. By doing a structured sale, the risk of foreclosure is non-existent and the payments are made like clockwork, however creative you wish to be. Now, with everything, there are considerations and things you need to watch out for. Certainly, get good advise. If I can be of further assistance, don’t hesitate to contact me at mark@virtuositypro.com
sold business how to beat the 48% tax? not interested in rebuying want to retire best investment do i have to pay approx 48% on sale? thank you business was in colorado