Posted on 09/14/2005 1:02:54 PM PDT by BurbankKarl
Amateur "flippers" in the real-estate market have more to worry about than a bubble. Many of them could be facing an income-tax audit -- and higher tax bills than expected.
The popularity of so-called flip deals has made section 1031 of the Internal Revenue Code popular with real-estate speculators. In a 1031 exchange -- also known as a "like-kind" exchange -- a person who sells a business or investment property can defer capital-gains taxes by immediately rolling the gains into a similar piece of property.
The trouble, tax experts say, is that people don't understand the rules. Many trust the advice of real-estate brokers, who often aren't well versed in tax law. Some amateurs are buying and selling properties too quickly, running the risk that the Internal Revenue Service may deem the transactions a person's trade or business, with gains taxed as ordinary income and subject to self-employment taxes.
To avoid taxes, you have to roll the proceeds into a similar property, which generally would be a business property or raw or developed land. You can't swap an investment property for a personal asset, such as a primary residence or a vacation home, Mr. Davis says.
In a like-kind transaction, real estate must be exchanged for real estate, a rule that sometimes trips up clients who have set up a single entity to hold property and shield them from liability.
-- there are other common mistakes that amateur investors make. One is not holding the property long enough. You must keep the investment for at least a year before selling to qualify for the preferential 15% capital-gains tax rate. If you sell before a year, the gain is subject to the highest income-tax rate of 35%.
(Excerpt) Read more at online.wsj.com ...
housing bubble ping
I tried to extract the major points of the article.
Thanks
Another Real Estate hit piece from the WSJ that accuses Real Estate Brokers of doing something unethical.
I guess I'd be upset too if I saw people taking money out of my industry (the stock market) and putting it into another (real estate).
First, real estate brokers can not set up 1031 exchanges. A seperate 1031 exchage entity, most commonly a title company in Florida, handles the escrow transaction and believe it or not informs their clients regarding the rules of the transaction.
To the read the WSJ you would think we all sell junk bonds.
Who writes this crap:
http://www.woodandmeredith.com/articles/1031article.html
Tax code nightmares. Bring on the Fair Tax!
Who writes this crap:
http://www.woodandmeredith.com/articles/1031article.html
We also have a family trust, and somewhere I heard that the trust makes the exclusion easier (though I don't understand why).
"once every two or three years"
I thought that was once in a lifetime. They must have changed it.
Nope. It's $250k for one person or $500k for a couple, and requires you to maintain primary residence for 2 out of the past 5 years.
I thought they killed that deal in the last tax cut.
"$500,000 exclusion per spouse"
I think that's $250,000 per individual. $500,000 per couple.
I thought that it was $250000per spouse and once in a lifetime. I like your Dude better than mine. Also did not know that you have to keep an investment property a year. That may not be right, because we do those tax free exchanges a lot. We even did a reverse tax free exchange which was interesting.
You may be right; I'm unclear on the amount. We didn't make that much so I sorta let the figure go through my head and out the other side...
You may be right; I'm unclear on the amount. We didn't make that much so I sorta let the figure go through my head and out the other side...
Oops. my first double post. Sorry
OK, here's the law: It's $250,000 per spouse, with a residency requirement of two years out of the last five. You can theoretically use it every two years, as long as you occupy the property as your primary residence the whole time. The old rule was that you could use the exemption only once in a lifetime, but you also had the Rollover Replacement Rule which allowed you to sell your appreciated primary residence, buy a replacement of equal or higher value, and pay no capital gains tax. They took that away...which is bad.
You don't have to pay AMT on capital gains, or dividends.
However, the lower rate might set off the AMT on your other income, depending on your mix of low-taxed income and regularly-income.
For example, if you had $1 million in capital gains, and made $200K in salary, you'd probably end up paying the 26% rate AMT on your salary, less the AMT allowance.
If, on the other hand, your income was the same but it was $600K capital gains, $600K salary, you wouldn't owe AMT because you're already paying more than 26% on your salary.
But the first example would still pay less overall income tax.
I think you're being too sensitive. The gist of this article is correct. Tell me why you think it isn't.
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