Archive for February, 2011
Before you sign on the dotted line…….
Surprising secrets you should read before buying your first home! www.trulia.com/newsletter
News from the Law Offices of Ronald S. Webster
“An optimist is someone who goes after Moby Dick in a row boat and takes the tartar sauce with him” - Zig Ziglar
With the recent rise in the number of real estate transactions many investors are jumping back into the game. A frequent question many foreign buyers have as well as investors is the tax consequence of their purchase. The general rule for individuals, both U.S. Citizens and Foreigners is that the profit on any property held for one year or more is taxed at the rate of 15%. However, this tax can be deferred at the time of sale if the seller purchases another investment property. It is a great way to turn a seller into a buyer.
Every agent should have a general working knowledge on the basics of a 1031 Exchange. For this reason I put together a list of the top frequently asked questions. I also have this information posted on my website should you wish to reference them in the future.
1. How is capital gain tax calculated?
Capital gain tax on property held for more than 365 days is computed at a flat rate of 15% and is due and payable in full on the next tax reporting year following the sale (commonly April 15th for most individuals). Gain is defined by taking the net closing proceeds and subtracting the “basis” of the property consisting of the actual purchase price together with closing costs and capital improvements, which enhanced or extended the life of the property. Real property taxes and general maintenance are not taken into consideration when establishing basis.
Section 1031 of the Internal Revenue Code defines a deferred exchange as one when which a taxpayer transfers property held for productive use in business or for investment and later receives property to be held for similar purposes. The key is intent. Accordingly, if a party owns a vacant lot and the intent was for investment purposes and later replaces this property with a condominium or house with the primary intent of rental or investment purposes the properties are deemed to be like kind.
3. What properties qualify for a tax deferred exchange?
Any property, which is not a primary residence may qualify. However, you must demonstrate the primary purpose was investment. In many instances where the property was held for investment purposes “basis” may have been reduced if depreciation had been taken on previous tax returns making a 1031 exchange more desirable.
4. Can more than one property be involved in an exchange?
Yes. Up to three properties can be sold and replaced with one property. Similarly, up to three properties may be utilized as a replacement property.
A Qualified Intermediary is a third party, not related or disqualified, who is designated to hold the net proceeds from the sale of the property in an independent escrow account to be utilized for the purchase of the replacement property. Should the seller have access to any funds following the closing the tax benefit will be lost.
If a Seller actually or constructively receives money or other non-like kind property (boot) for the property sold that portion of the transaction is treated as proceeds of sale and taxed accordingly.
Yes. However, any funds that are ultimately received are considered to be boot and thereby subject to capital gains at the rate of 15%.
Within 45 days of the date of the sale of the relinquished property notice must be sent to the Exchange Partner in writing signed and dated by the taxpayer setting forth the legal description of the replacement property to be acquired.
9. When must the replacement property be purchased?
No later then 180 days from the initial sale and closing of the relinquished property.
Yes. The use of money including interest earned in a qualified escrow account can be utilized to pay specific transactional expenses listed as the responsibility of Buyer or Seller.
Yes. The aggregated fair market value of the replacement property cannot exceed 200% of the fair market value of the relinquished property. Furthermore, if furniture is involved in the sale it must be incidental and cannot exceed 15% of the aggregated fair market value.
Yes. Effective September 15, 2000 the I.R.S. set forth guidelines, which allow replacement property to be purchased in advance of selling the property to be purchased. However, rules are complex and must be strictly followed.
13. Can new construction qualify for 1031 treatment?
Yes. Under careful guidelines. However, construction on an existing lot currently owned by the taxpayer will not qualify. Funds must be utilized for the acquisition of property and not just improvements.
14. Can a motor home, mobile home, yacht, or sailboat qualify as part of the exchange?
No. These items are considered personal property and only real property can qualify.
15. Are 1031 exchanges limited to U.S. citizens?
No. Any individual or entity may qualify for a 1031 exchange regardless of whether or not they are U.S. Taxpayers, however, real property located outside the U.S. will not be deemed “like kind”.