Can an investor get partially tax-deferred real estate exchange?
Extracting cash from transaction has drawbacksBy JOYCE NENNINGERQuestion: For about 15 years, my husband and I have owned a rental house. We have now decided to sell it. Do the rules of Internal Revenue Code 1031 require us to put all the cash paid by our buyer into the purchase of a replacement rental property to qualify for a tax-deferred exchange? Or can we take out some cash without losing the tax-deferral on the rest of our profit?Answer: According to Robert Bruss of Inman News: If you want to achieve 100 percent tax deferral on your exchange for another rental property, you must trade equally or up in both price and equity for another “like kind” rental or business property. That means you cannot take out any cash (called “boot”) from the transaction. However, if you decide to take out some cash, such as $50,000, that portion of your capital gain then becomes taxable at the current 15 percent federal tax rate, plus any applicable state tax. Also, there is depreciation recapture to consider at the special 25 percent federal “recapture” tax rate – presuming you plan to make an IRC 1031(a)(3) delayed Starker exchange. That means you don’t have to make a direct trade for the qualified rental or business property acquired. But you will need a third-party intermediary to hold the cash from your property sale beyond your “constructive receipt.” Most title companies now have these subsidiary firms easily available. For full details, please consult your tax adviser.
You can reach Robert Bruss at (800) 736-1736.Question: Joyce, we are rather traumatized at the idea of buying a home. We don’t know where to start. Do you have any suggestions?Answer: Following are 10 tips for taking the trauma out of homebuying: 1. Find a real estate agent that’s simpatico. Homebuying is not only a big financial commitment, but also an emotional one. It’s critical that the agent you chose is both skilled and a good fit with your personality.2. Remember, there’s no “right” time to buy, any more than there’s a right time to sell. If you find a home now, don’t try to second-guess the interest rates or the housing market by waiting. Changes don’t usually occur fast enough to make that much difference in price, and a good home won’t stay on the market long.3. Don’t ask for too many opinions. It’s natural to want reassurance for such a big decision, but too many ideas will make it much harder to make a decision.4. Accept that no house is ever perfect. Focus in on the things that are most important to you and let the minor ones go.
5. Don’t try to be a killer negotiator. Negotiation is definitely a part of the real estate process, but trying to “win” by getting an extra-low price may lose you the home you love.6. Remember your home doesn’t exist in a vacuum. Don’t get so caught up in the physical aspects of the house itself – room size, kitchen – that you forget such issues as amenities, noise level, etc., that have a big impact on what it’s like to live in your new home. 7. Don’t wait until you’ve found a home and made an offer to get approved for a mortgage. Investigate insurance availability, and consider a schedule for moving. Presenting an offer contingent on a lot of unresolved issues will make your bid much less attractive to sellers.8. Factor in maintenance and repair costs in your post-home buying budget. Even if you buy a new home, there will be some costs. Don’t leave yourself short and let your home deteriorate.9. Accept that a little buyer’s remorse is inevitable and will probably pass. Buying a home, especially for the first time, is a big commitment, but it also yields big benefits.10. Choose a home first because you love it, then think about appreciation. While U.S. homes have generally appreciated, a home’s most important role is as a comfortable, safe place to live. Question: Joyce, we own a small condo that we live in. We are thinking of moving up into a larger townhome or single-family residence. When does it make sense to move up into something bigger?
Answer: Take a look at the following questions. As you answer them, the decisions should become clearer to you. – How much equity do you have in your home? Look at your annual mortgage statement or call your lender to find out. Usually, you don’t build up much equity in the first few years of paying a mortgage, but if you’ve owned your home for a number of years, you may have significant unrealized gains.- Has your income increased enough to cover the extra mortgage costs and the costs of moving?- Is the neighborhood still a good one for your needs? For example, if you’ve had children, the quality of the schools may be more of a concern now than when you first purchased.- Can you add on or remodel? If you have a large yard, there might be room to expand your home. If not, your options may be limited. Also, do you want to undertake the headaches of remodeling yourself?- How is the home market? If it’s good, you may get top dollar for your home.- How are interest rates? A low rate not only helps you buy more home, but also makes it easier to find a buyer.Call JOYCENENNINGER at (970) 468-6800 or (800) 262-8442 for answers to your real estate questions. Or e-mail Joyce@SummitRealEstate.com or you can visit her website at http://www.SummitRealEstate.com. She has lived in Summit County for more than 20 years. Joyce is the broker/ owner of Summit Real Estate – The Nenninger Team at the Dillon Ridge Marketplace. Her longtime residency and years of real estate experience can help you make the most of any buying or selling situation. She is a Certified Residential Specialist (CRS), the highest designation awarded to a Realtor in the residential sales field. She ranks in the top 4 percent of Realtors nationally.
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