How to Create a Sound Tax Strategy for REI partII (Miami)
After we covered some of the risks associated with real estate investment in our previous article, we are now going to look into certain tax strategies. These strategies can help you minimize, defer or reduce the tax you owe on your investment properties and set you up for higher ROI rates.
The Like-Kind Exchange - Tax Deferral for Gain
When you sell your real estate property you have the right to defer taxes on the gains from it if you are exchanging for another, similar property. In such scenarios, neither gains or losses are recognized. There are particular requirements that need to be met in order to qualify for the like-kind exchange treatment:
You must find a suitable like-kind property for which you want to exchange your own within 45 days after you have transferred the property you want to dispose of.
You must receive the identified like-kind property within Protected content after the transfer of your own, or before the due date of your annual tax return if that falls earlier. Tax return extensions are disregarded on this occasion.
Also, you need to know that:
If you receive money, a property that is not classified as like-kind or net debt relief, a gain on the exchange will be recognized.
If any of the two parties in a like-kind exchange disposes of their property within two years of the transaction, a loss or a gain will be recognized.
The like-kind exchange strategy does not apply for properties used for personal residence.
When you decide to go with this strategy you must find a property that is of the same character. Here are some of the qualifying options you can take advantage of:
Exchange a property held for a productive use in a trade or business for one that is held for investment.
Exchange an estate with rental apartments for a farm
Exchange a city residential property for a ranch
More qualifying options you can find in the Tax Advisor’s Guide to Real Estate Investment or when you speak to one of our advisors.
What Routes Can You Go for an “Exchange”
Purchasing a property is certainly not an exchange. Here are some scenarios in which a real estate property transaction will qualify as like-kind exchange:
The two parties have properties of the same character and they swap them
A third party gets involved by purchasing and exchanging properties in order to satisfy the like-kind exchange requirements.
If you have managed to qualify for a tax-free like-kind exchange the tax basis on the property you have received should normally be equal to the adjusted tax basis of the property you’ve given. However, there are some exceptions and it is important to familiarize yourself with them because when there’s cash or non-like-kind property involved in the exchange, any gains resulting from it are taxable in the individual’s tax return, but if the transaction registered a loss, it would be disregarded in the return.
The Installment Method
This method is used to relieve the financial pressure of having to pay taxes on gains generated by the exchange of a property. You can spread the payments over several years, however, here is interest added on top for sales of properties with a price exceeding $150,000.
Section Protected content or Loss
If a property used in trade or business generates a gain or loss this is not regarded as capital gain or loss, but Section Protected content . When the Section Protected content throughout the tax year are higher than the same type of losses, the net gain is regarded as long-term capital gain. In the reverse case, though, the net loss is treated as an ordinary loss.
You can take advantage of tax credits if you are investing in low-income housing or the renovation of old historic structures. Generally tax credits are a fantastic tax shelter, but there are some limitations that you need to be aware of.
“At risk” limitation - this limits the amount of deductions an investor can claim on their losses related to real estate activities as he or she wasn’t considered protected against losses when they made the investment.
Passive Loss rule - this rule limits the amount of aggregate deductions from all passive activities to the amount of their aggregate income of all these activities.
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Are you thinking of investing in real estate? FAS CPA & Consultants can provide valuable advice on how to begin the process and what tax strategies to use to maximize your profit.
Fulton Abraham Sanchez, the founder of FAS CPA & Consultants of Miami, FL, is a Certified Public Accountant specialized in Tax Planning. You can email him to Protected content .
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