TAX ISSUES Browse through this page or follow links of your interest Reducing Taxes - The Old Tricks Still Work!
Real Estate Taxes
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Investors avoid Capital Gains
By Steve Meredith
Defer Income
Standard tactics include these: Contribute the maximum amount to a pension fund. Have your bonus at work delayed until after the end of the year. Delay the sale of assets until January. If you are self-employed, delay your December billing so as to collect on the receivables in January.
Accelerate Expenses
This includes paying bills that you would ordinarily pay in January of the following year in December. Examples include paying your last State Estimated Tax payment (due in January) in December to get a deduction this year. If you expect to be in a lower tax bracket next year, pay some EXTRA state tax on or before December 31. Take the deduction this year, then file your State tax return and get the refund. The refund will have to be included as income, but it will shift into next year.
Pay any outstanding medical bills or dental bills. If you are expecting a large medical bill, get the doctor, dentist or orthodontist to agree to a lump sum payment and use the bunching strategy. Bunching means taking all the deductions in one year instead of spreading them out -- since medical deductions are subject to a limit based on your income (7.5% of AGI) you will get a deduction in one year by bunching instead of getting no deduction for two years in a row.
If you are self-employed and need a new computer or desk or auto, buy it a little sooner. Caution, the Senate passed a new tax bill and sent it the House of Delegates that would cap the depreciation on autos at only $25,000. Some of us were able to buy a new $40,000 vehicle last year and write off the whole thing. The effective date of this legislation is February 5, 2004. If you buy a new auto now, you may not get the deduction you had been anticipating. Other than autos, other equipment can still be written off under section 179 up to $100,000.
Business Insurance for Your Office - ask your agent for a two-year policy. Now according to IRS, You can pay it and deduct it all as long as the policy covers less than three years.
Match Capital Gains and Losses
Savvy investors look for a method to keep track of their gains and losses throughout the year. That way they can sell some losers to offset their winning positions in the market. Some people offset gains in real estate sales with stock market losses. Matching is an important tool near the end of the year.
Give Stock to Charity
This tried and true method is used to avoid paying tax on the sale of a winning stock position. If you are going to give a gift to a charity anyway, why not cut your cost of that gift by giving a stock that has doubled? It cuts your cost in half, and the charity is no worse off. I have a client who goes to their pastor early in the year and says this is my gift for the year - I wont be putting the envelopes in the tray.
Share Your Income
Give your children some stock to cash in. Their basis is the same as yours, but their tax bracket is lower. Watch out for the tax on children under 14 (Kiddie Tax), but the capital gains rate for people in the 15% and 10% tax brackets is now 5% on capital gains, and is scheduled to go to 0% - thats right - 0%. So if you have a child in private school or college, dont pay tuition with after tax dollars. Instead, give them a winning stock and let them cash it in. They may pay little or no tax thereby cutting your cost of supporting them. Check on the various tuition tax credits before having them pay tuition. They may be better off paying for their apartment with their money and paying tuition with your money.
Make the child a part owner of an LLC that owns some assets. The income producing assets could be stocks, bonds, real estate, or any other investment. When the LLC makes money, you still control the LLC, but the income is split on the tax returns of the owners, thereby sheltering some at a lower tax rate on the childs returns. Again, be mindful of the Kiddie Tax.
Convert Regular Income to Capital Gains
This is a time consuming strategy that takes several years to develop into a real double tax saving device. Real estate investments may have positive cash flow, but show a loss for taxes. The reason is because the depreciation is basically straight line over 27.5 years, while the amount of principle paid on the loan is on a hyperbolic curve, starting very low and increasing with each payment. As long as the principle paid is less than the depreciation, you are on the good side of the curve and deducting more than actually spending. When you get on the other side of the curve, you sell the place and pay only the capital gains tax on the sale. This gives you an offset against current ORDINARY income during ownership, and a tax at the lower Capital Gains rates on the sale. In other words, deduct the operating expenses at a 30% rate and pay tax at 15% later.
Avoid the Tax by Doing a Tax Free Exchange
Business property can be exchanged tax-free. The rules are many, but more and more people are taking advantage of this technique. Dont be afraid to save taxes just because it sounds complex. You hire a company to handle the details, you sell on investment and buy another. This cannot be done with stocks and bonds. It is usually done with real estate or business equipment.
Move!
Your home has its own special tax break. As long as you are willing to move every two years you can pocket the gain without tax up to $250,000 for single people and $500,000 for married couples. I have several clients who look for houses they can get in a good neighborhood and buy it cheap with the anticipation that they will move and pocket the gain tax free in two years. One client has built his own home three times now, and each time has built a larger home that has earned more profit on the sale.
Look for details on these and hundreds of other strategies from Steve at the Infinite Wealth Workshop in Raleigh next week.
If you answered ''yes'' to both those questions, you are among the millions of U.S. real estate investors who want to sell their rental or investment property without owing a large capital gains tax. Many real estate fortunes have been earned by savvy investors who understand how to avoid capital gains tax when selling their investment properties. The best-known example was documented in the classic bestseller real estate book, How I Turned $1,000 into $5 Million in My Spare Time, by the late William Nickerson, who pyramided his way to wealth without tax erosion of his profits. The secret is tax-deferred exchanges, as authorized by Internal Revenue Code 1031. The simple tax rule for avoiding capital gains tax when disposing of a rental or investment property is that the investor must trade ''equal or up'' in both price and equity for one or more qualifying ''like-kind'' properties without removing any taxable ''boot,'' such as cash or net mortgage relief. After 1984, when so-called Starker exchanges became legal in Internal Revenue Code 1031(a)(3), investment property trades became even easier. Investors no longer have to make direct trades. They can instead have the sales proceeds held by a third-party accommodator or intermediary beyond their ''constructive receipt,'' and then use that money to buy a new property. However, there are strict time limits. After the first property is sold, the ''up trader'' has 45 days to designate to his intermediary the property to be acquired. For this reason, it is wise to have the ''up leg'' of the exchange lined up before selling the old property. Up to three possible property acquisitions can be designated. Then the trader can take up to 180 days from the sale date to complete the tax-deferred acquisition. More than one property can be traded on either side of the exchange. For example, I could trade two rental houses for one apartment building of equal or greater cost and equity. Or I can trade my office building for three rental houses of equal or greater total cost and equity. Internal Revenue Code 1031 requires a ''like-kind'' property trade. But ''like-kind'' does not mean ``same kind.'' ''Like-kind'' simply means all properties in the tax-deferred exchange must be held for investment or for use in a trade or business. Virtually the only properties that are not eligible for tax-deferred trades are your personal residence and property owned by a ''real estate dealer'' such as a home builder. For example, if you own a rental house you want to exchange for an office building of equal or greater cost and equity, that situation qualifies. Or you can trade your vacant land, held for investment, for a shopping center, warehouse, or rental house. The obvious reason for trading investment or business property, instead of selling it, is to avoid the capital gains tax on the profit. But there are at least 10 other reasons to exchange. They include pyramiding your investment property equity without tax erosion of your sale profit; minimizing or eliminating the need for new mortgage financing on the property acquired; acquiring more desirable property; increasing your depreciable basis; acquiring a property that better meets your investment or business needs; partially deferring profit tax while trading down to a smaller property that is easier to manage; avoiding the 25 percent depreciation recapture tax when selling an investment or business property; refinancing either property before or after (but not during) the exchange to take out tax-free cash; accepting an unexpected desirable purchase offer to sell a property and avoid capital gain tax; and avoiding capital gains tax by still owning the last property in your pyramid chain of tax-deferred trades when you die. Savvy real estate investors have tried to figure out how to make tax-deferred exchanges of their investment or business properties for their ultimate dream homes. However, as explained earlier, personal residences don't qualify for IRC 1031 tax-deferred trades because they are ``unlike property.'' The simple solution is to make a tax-deferred exchange up for your ultimate dream home. However, because a personal residence can't qualify, the acquired property must be a rental at the time of the trade. Most tax advisor suggest renting it to tenants for at least 12 months before converting it to the your personal residence. In 2004, Congress plugged a big loophole in this scheme, which had allowed an investor to move into a dream home acquired in a trade, live in it for at least 24 months and then sell it and claim the generous Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 for a single owner or up to $500,000 for a qualified married couple filing a joint tax return. After Oct. 22, 2004, for sales of a residence acquired in an IRC 1031 tax-deferred exchange to use the principal residence exemption, the home must be owned at least 60 months before sale. At least 24 of those 60 months the owner must occupy the home to qualify. If you acquired your ultimate dream home, and perhaps millions of dollars of investment property, in tax-deferred exchanges, which you still own at the moment of your death, you will have achieved the ultimate tax shelter. Uncle Sam will be so overcome with grief at your passing, he will completely forgive any capital gain tax or depreciation recapture tax that would have become due if you sold your real estate the day before your death. However, the net worth of your real estate (market value minus secured debt) will be included in your estate. For deaths after Jan. 1, 2006, total estate net assets less than $2 million are fully exempt from federal estate tax. Also, assets left to a surviving spouse are free of the federal estate tax. To make matters even better, your heirs will be overjoyed to learn they will receive a new ''stepped-up basis'' to market value on the date of your death for the assets they inherit.
Stephen S. Meredith CPA: Steve owns and operates a private accounting firm which focuses on creating and implementing wealth building strategies for business owners, investors, and real estate professionals. Early in his career Steve began researching strategic ways to assist his clients in making the most of their investments while benefiting from the tax advantages they offered. This complex field has presented a changing landscape over the years and Steve offers up-to-the-minute tax and strategic planning advice to those who are serious about improving their financial status.
Steve, a licensed pilot who travels the east coast extensively, is also a real estate investor and speaks regularly on investment and operation of real estate. Steve has degrees in both Accounting and Information Systems. He has implemented bookkeeping systems for hundreds of clients, and customized spreadsheets for situations when creative and flexible analysis was required. Strategic Planning, Business Structuring and Investment Analysis are Steves strengths. Using mathematical models and his knowledge of the tax code enables Steves clients to make better long-term decisions, thereby helping them keep their net worth growing.
Disclaimer: All information provided in this website is believed to be accurate, but subject to errors and omissions, and it is not intended to provide legal or financial counsel. Please consult a tax or legal professional for answers about your specific situation.
Savvy investors know how to avoid capital gains taxes
Many real estate fortunes have been earned by savvy investors who understand how to avoid capital gains tax when selling their investment properties.
BY ROBERT J. BRUSS www.bobbruss.com
Do you own a rental or investment property that would produce a large taxable capital gain if you sell that property? Would you like to avoid paying any capital gain tax on your sale?
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Real Estate Taxes
Tax Links
Extranjeros,
Foreign NationalsGain or Loss
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Proposes Tax Law changes
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