Specializing in Flawless Section 1031 Exchanges For Over 27 Years

QINews 

                                                                         Volume - 6.2- June 2008

Christine attended the April 2008 mid-year conference of the Federation of Exchange Accommodators (FEA) in Atlanta and came home with a few new tools for our exchange clients.

Christine proudly reports that daughter Kate is working full-time as a Registered Dental Hygienist, working in three different offices, and that daughter Holly is a Registered Nurse at Dartmouth-Hitchcock Hospital and a new homeowner!

If you have called the office lately and you have heard a new voice on the other end of the line, it is probably John Hamrick, our new Client Services Director. John will be helping us to spread the good word on the strategic uses of Section 1031.  We are delighted to welcome John to our team.

George has opened up his camp in Maine for the summer and he reports that the fishing boat is "in the water."  In case you're looking for him on Friday afternoons, that's where you'll find him.

A new tax provision provides for a zero percent capital gains rate for certain taxpayers. There has been some publicity surrounding this IRS "gift" but with all brightly packaged gifts, unwrapping the jargon usually produces a smaller package than first appears.

Here's how this works; during the 2008-2010 tax years, upon the sale of a capital asset, taxpayers below the 25% bracket, $32,550 for individuals, $42,650 for head of households and $65,100 for married couples filing jointly, will have no tax to pay if their combined taxable income and capital gains is less than these thresholds.

For example, Married Taxpayers file jointly and have taxable income of $90,000, comprised of $50,000 of ordinary income and $40,000 of capital gain (perhaps as boot from an exchange). Since their ordinary income is below $65,100, $15,100 of the capital gain would be eligible for the 0% rate and the balance would be at the 15% rate.

So don't rush into a sale before you put pencil to paper and calculate the tax exposure. Some taxpayers will find relief in the new provisions over the next three years, while others won't.  In most cases, the tax exposure will be greater than zero!

While this balancing act is not for everyone, rather than face the taxes due when an exchange fails, this may be an option that will provide tax relief. The disappointment of a failed exchange (one where the identification fails or the replacement property is undesirable) is exacerbated by the tax consequences of having to pay the federal capital gains tax, recapture of previously taken depreciation and often, state capital gains or business profits tax.

The strategy is to either convert the cash sale into a promissory note payable over time or to convert the
proceeds into an annuity, thereby stretching the tax that would otherwise be immediately payable into a series of payments with a long term income stream. Using this methodology, the failed exchange will no longer be the worst result of a sale. This technique also works for sale of assets that cannot be exchanged. Typically, this will be the goodwill, trade name, customer lists, etc. as part of the sale of a going concern. We would be happy to discuss the risks and rewards of your situation, just give us a call.

We have received numerous calls asking what the capital gains rate is for the sale of a primary residence. In addition, callers want to know if they can avoid capital gains after they reach a certain age. The law of the land since 1997 has been defined by Section 121 of the Internal Revenue Code. If your property has been your primary residence for two of the last five years, upon sale, the capital gains in the property is excluded up to $250,000 per individual or $500,000 for a married couple filing jointly. The bottom line is that if your gain exceeds the limitations, you will be exposed to tax. Age does not play a part in the regulation, apparently you are never too old to pay taxes! If there is excess property or business property embedded in the residential property, then a partial Section 1031 would produce the best tax deferred result. Click here for additional details of how this technique can be employed.

Section 121 does not provide any exclusion from capital gains tax for the sale of a vacation or second home. One alternative is to make the second home your primary residence for a minimum of two years prior to the sale. Of course this demands that you relocate all of your belongings to your tranquil weekend retreat. The other alternative is to protect the gain in these properties (with careful planning) by converting from personal use to rental for two years prior to the sale. Once the property has been firmly established as rental property, it can be exchanged.

Cash Flow or Appreciation  

Slower economic times are nothing to cry about, they simply call for real estate investors to analyze their existing portfolios and to scour the marketplace for timely buys. The question is whether your investment intent is to count on cash flow or pure market appreciation in making your decisions. Depending on the mix and your goals, you may indeed have both types of property in your portfolio; you can establish your own tolerance for risk and reward.

A Section 1031 Exchange can be a powerful tool in making your buy/sell decisions. If your portfolio performance is below your expectations, it may be time to exchange one or more of your properties for more productive real estate.

For more information on how this can be applied to your land sale click here.

The silver lining in Section 1031 is the ability to use your untaxed appreciation in acquiring property with increasing value. The fact that you are not leaving tax money on the table in each sale allows you to acquire more expensive property. Wealth building is far more efficient with before-tax dollars than after-tax dollars.  Don't sell your property without first considering an exchange.  We can show you the Power of Section 1031.

The misconception is that if you don't wholly own the existing property that it is not exchangeable. Of course, this is not the case. No matter how you slice it, any interest in real property whether it is whole or in part can be exchanged; remember it is the value you are exchanging. A case in point to illustrate: Our client held a 60% interest as a tenant-in-common with his brother-in-law. The two decided to sell the property but they differed on how to handle the proceeds. Our client elected to treat his 60% interest as an exchange, while his brother-in-law converted his 40% interest to cash at closing, with all of its tax effects. Our client used the proceeds to acquire two office condos, one for his own business, the other to be rented to others. If his business grows as planned,  he will eventually use both condos as his business property.

Case Study #20 - Exchange it Again!

We just represented a client that called us at the eleventh hour because he didn't think he had a capital gain problem. The property under agreement had been owned for less than three years and there was only a small gain at stake. However, upon further discussion, he revealed that he had acquired the property with exchange funds, previously sheltering over $70,000 in gain.

His choice was to trigger the tax or exchange the property again and continue the tax deferral. Yes, it is possible to exchange again and in most cases will be the best advice to continue sheltering the deferred gain. Once you conduct an exchange, you will more than likely exchange again and again; there is no limit on the number of times you can employ this strategy.

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Contact Christine S. Latulip at 603-444-0020 for information.