Most investors do a great job researching and analyzing several properties to ensure they get the property that suits their investment strategy for the best price. Sadly, too many of those same investors allow too much of their hard earned dollars to end up in the hands of the IRS simply because they don’t involve their tax expert before they make investment decisions.
Properties are sold by investors for several reasons. Some want to continue in real estate investment, but want to upgrade their properties, or find the current neighborhood deteriorating. Others want to reduce their investment holdings. For these transactions, there are three ways to significantly avoid paying unnecessary taxes: like-kind exchanges, installment sales, and turning the rental property into your personal residence. This article focuses on like-kind exchanges. Future articles will address installment sales and conversions to personal residences.
When investors decide to upgrade their properties, or sell in an area where the value has peaked and buy where the value is starting to increase, the best way to avoid paying taxes is to do a like-kind exchange. The investor normally has to pay a capital gains tax of up to 24.55% (15% federal and 9.55% state) on the profits from the sale of the property. (And taxes are only going to get higher in the near future.) If your intent is to reinvest in another property, you can defer those taxes by doing a like-kind exchange.
By going through a qualified accommodator, who holds the money from the sale of the investor’s property, no taxes are owed, as long as no money or other value is received by the seller. This allows you to use all of your investment for the new property rather than having to settle for less due to paying taxes.
The timing has to be done to IRS specifications. Make sure your real estate agent has done several exchanges and that the accommodator has a good reputation and is financially solid. Some accommodators have recently fallen on difficult times, causing a freeze on investor money which has resulted in failed exchanges and taxes owed!
Richard Lagomarsino, EA is the president of FTMS Inc, and is an enrolled agent who is able to represent and help solve clients’ problems before the IRS. If you wish to avoid or prevent paying unnecessary taxes, call 916-773-1200 or visit www.ftms.net.
Showing posts with label real estate investor. Show all posts
Showing posts with label real estate investor. Show all posts
Monday, September 6, 2010
Tuesday, August 14, 2007
Holding Title as Community Property With Right of Survivorship
This article is for informational purposes only. Nothing in this article should be understood as legal advice, and no attorney-client relationship is created by it or the information it contains. Consult with a licensed attorney if you require assistance in a legal matter. This article is protected by United States copyright law and may not be reproduced, distributed, transmitted, displayed, published or broadcast without the prior written permission of The Burton Law Firm. You may not alter or remove any trademark, copyright or other notice from copies of the content.
Ownership of real property can take a great number of forms. The difficulty is deciding which form of title is right for you, your family, and your business. The facts of your situation will determine how title to property should be held, and properly selecting title form may involve transferring or re-titling property you already own. This article will provide an overview of a new form of title that many people are not yet familiar with: community property with right of survivorship (CPWROS).
Prior to 2001, married couples had to perform a bit of strategic planning when taking title to property. But the California legislature wanted to make it easier for California married couples to take advantage of federal tax benefits. On July 1, 2001, a new form of title was created: community property with right of survivorship. This form of title utilizes the right of survivorship feature while allowing a step-up in basis for community property.
Right of Survivorship
The right of survivorship feature allows the deceased spouse’s property ownership to immediately pass to the surviving spouse upon the first spouse’s death. Generally, no court administration is needed, thus avoiding the time and cost of the probate process.
Step-Up in Basis for Community Property of Both Spouses
A step-up in the basis of property provides an important tax benefit. When you acquire and maintain real property, you invest a certain amount of money in the form of purchase price and improvements. This investment becomes your basis in the property. When you sell or dispose of the property, you recognize a capital gain equal to the current fair market value of the property (i.e., what you sold it for) minus your basis. So if the property has appreciated in value over time, you want your basis to be as close as possible to the fair market value so that you can reduce gain. Reducing gain reduces the taxes that must be paid. A step-up in basis allows you to increase your basis in the property without recognizing any gains, which is a good thing. In a way, stepped-up basis is like the government handing a free investment.
CPWROS provides a large step-up in basis for property owned by a married couple in California. In a joint tenancy, the federal taxation system only allows a step-up in basis for the deceased spouse’s joint tenancy interest. Thus, the surviving spouse receives a stepped-up basis in the property equal to the fair market value of the deceased spouse’s joint tenancy interest.
But with CPWROS, when the first spouse dies and leaves property to the surviving spouse, the surviving spouse receives a step-up in basis both for the deceased spouse’s one-half interest in the community property and for the surviving spouse’s interest in community property. So the surviving spouse acquires a stepped-up basis in all of the community property, not just the deceased spouse’s share.
Conclusion
The goals, finances, and assets of your marriage and your business will all play a role in determining how you should hold title to real property. It is important to note that a properly drafted revocable living trust will provide these and other benefits as well. You should consult with an attorney to help determine whether holding property as community property with right of survivorship is right for your situation.
By The Burton Law Firm
For a more in depth review of this subject, please see: www.lawburton.com, news/resources.
The Burton Law Firm
555 University Avenue, Suite #275
Sacramento, CA 95825
Phone: (916) 570-2740 Fax: (916) 570-2744
www.lawburton.com
info@lawburton.com
For more information regarding RNB Property Management, Inc. please call
916-435-2424 or visit us online at www.RNB2day.com or
Property Management Rocklin
Ownership of real property can take a great number of forms. The difficulty is deciding which form of title is right for you, your family, and your business. The facts of your situation will determine how title to property should be held, and properly selecting title form may involve transferring or re-titling property you already own. This article will provide an overview of a new form of title that many people are not yet familiar with: community property with right of survivorship (CPWROS).
Prior to 2001, married couples had to perform a bit of strategic planning when taking title to property. But the California legislature wanted to make it easier for California married couples to take advantage of federal tax benefits. On July 1, 2001, a new form of title was created: community property with right of survivorship. This form of title utilizes the right of survivorship feature while allowing a step-up in basis for community property.
Right of Survivorship
The right of survivorship feature allows the deceased spouse’s property ownership to immediately pass to the surviving spouse upon the first spouse’s death. Generally, no court administration is needed, thus avoiding the time and cost of the probate process.
Step-Up in Basis for Community Property of Both Spouses
A step-up in the basis of property provides an important tax benefit. When you acquire and maintain real property, you invest a certain amount of money in the form of purchase price and improvements. This investment becomes your basis in the property. When you sell or dispose of the property, you recognize a capital gain equal to the current fair market value of the property (i.e., what you sold it for) minus your basis. So if the property has appreciated in value over time, you want your basis to be as close as possible to the fair market value so that you can reduce gain. Reducing gain reduces the taxes that must be paid. A step-up in basis allows you to increase your basis in the property without recognizing any gains, which is a good thing. In a way, stepped-up basis is like the government handing a free investment.
CPWROS provides a large step-up in basis for property owned by a married couple in California. In a joint tenancy, the federal taxation system only allows a step-up in basis for the deceased spouse’s joint tenancy interest. Thus, the surviving spouse receives a stepped-up basis in the property equal to the fair market value of the deceased spouse’s joint tenancy interest.
But with CPWROS, when the first spouse dies and leaves property to the surviving spouse, the surviving spouse receives a step-up in basis both for the deceased spouse’s one-half interest in the community property and for the surviving spouse’s interest in community property. So the surviving spouse acquires a stepped-up basis in all of the community property, not just the deceased spouse’s share.
Conclusion
The goals, finances, and assets of your marriage and your business will all play a role in determining how you should hold title to real property. It is important to note that a properly drafted revocable living trust will provide these and other benefits as well. You should consult with an attorney to help determine whether holding property as community property with right of survivorship is right for your situation.
By The Burton Law Firm
For a more in depth review of this subject, please see: www.lawburton.com, news/resources.
The Burton Law Firm
555 University Avenue, Suite #275
Sacramento, CA 95825
Phone: (916) 570-2740 Fax: (916) 570-2744
www.lawburton.com
info@lawburton.com
For more information regarding RNB Property Management, Inc. please call
916-435-2424 or visit us online at www.RNB2day.com or
Property Management Rocklin
Tax Saving Strategies for Real Estate Investors
There are many tax saving strategies that attract investors to real estate investments. Paying capital gains on profits at 15% rather than up to 35% on ordinary profits is one such strategy. There are a variety of other ways to save your dollars. In each Landlord Today article, we will focus on one tax saving strategy you or your current tax preparer may not have thought about.
Make the Most of Depreciation.
As mentioned above, most know that depreciating their properties brings tax savings, but a lot of investors miss valuable depreciation deductions because they don’t know how to make the most of them. The following steps will help you get more annual depreciation to save tax dollars:
Step 1: Divide basis between “land” and “improvements.” Remember land provides no depreciation, so the goal is to assign as much as possible to depreciable improvements. The IRS suggests you use local property tax assessments. You can use any allocation (such as bank appraisal or your insurer’s estimate of replacement costs) so long as you show “reasonable basis.” Don’t forget that driveways and sidewalks crack, landscaping needs replacing, and pipes from the house to the street deteriorate over time. Consequently, you can depreciate land improvements over 15 years. If you miss those assets, you lose money!
Step 2: Split out components of the building to get shorter depreciation periods. Buildings depreciate over 27.5 years for residential property and 39 years for nonresidential property. But isn’t a building a collection of components? Of course it is. Buildings include structural components like walls, roofs, furnaces, and windows that are integral to the building. These depreciate over the traditional 27.5 and 39-year periods. But buildings also include personal property that depreciates over just 5 years. It makes sense that if you allocate part of your purchase to that personal property, you’ll boost your depreciation during the first few years you own your property. These are probably the years you need it most! Personal property examples include cabinets, countertops, dishwashers and carpeting.
By Richard Lagomarsino, EA
Richard is the president of FTMS Inc. Go to www.ftms.net for more helpful information.
For more information regarding RNB Property Management, Inc. please call
916-435-2424 or visit us online at www.RNB2day.com or
Property Management Rocklin
Make the Most of Depreciation.
As mentioned above, most know that depreciating their properties brings tax savings, but a lot of investors miss valuable depreciation deductions because they don’t know how to make the most of them. The following steps will help you get more annual depreciation to save tax dollars:
Step 1: Divide basis between “land” and “improvements.” Remember land provides no depreciation, so the goal is to assign as much as possible to depreciable improvements. The IRS suggests you use local property tax assessments. You can use any allocation (such as bank appraisal or your insurer’s estimate of replacement costs) so long as you show “reasonable basis.” Don’t forget that driveways and sidewalks crack, landscaping needs replacing, and pipes from the house to the street deteriorate over time. Consequently, you can depreciate land improvements over 15 years. If you miss those assets, you lose money!
Step 2: Split out components of the building to get shorter depreciation periods. Buildings depreciate over 27.5 years for residential property and 39 years for nonresidential property. But isn’t a building a collection of components? Of course it is. Buildings include structural components like walls, roofs, furnaces, and windows that are integral to the building. These depreciate over the traditional 27.5 and 39-year periods. But buildings also include personal property that depreciates over just 5 years. It makes sense that if you allocate part of your purchase to that personal property, you’ll boost your depreciation during the first few years you own your property. These are probably the years you need it most! Personal property examples include cabinets, countertops, dishwashers and carpeting.
By Richard Lagomarsino, EA
Richard is the president of FTMS Inc. Go to www.ftms.net for more helpful information.
For more information regarding RNB Property Management, Inc. please call
916-435-2424 or visit us online at www.RNB2day.com or
Property Management Rocklin
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