Tax Planning for the Investor: Like-Kind Exchanges

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.

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
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