Considering a 1031 exchange for that oceanfront home? Then make sure you know about the latest tax ruling so you can avoid paying taxes on the gain of your sale.
For the uninitiated, a 1031 exchange provides for the deferral of gain from one investment property into another. Make sure you read that clearly: ...from one investment property into another, ie. properties held for personal enjoyment do not qualify. The latest tax ruling reinforced this clarification so now attention is being directed towards how to differentiate a property "from pure personal enjoyment and document it as an investment property."
The first step is to regard your property as an investment and operate it as such. In the case of that oceanfront home, renting it and maintaining good records of all communications. There are plenty of property management companies to choose from. Next, make sure you understand what the IRS expects for validating an investment property. The IRS allows you 14 "personal enjoyment" days and a "reasonable" number of maintenance days. You may also be able to work in up to more weeks of "business days" use if you are able to support such use.
Come tax time, be sure to include Schedule E for rental property. This form includes income, expenses, interest and taxes for your property. This is different from your personal return because that one is specifically for your personal residence. Including items that should be on Schedule E on your personal return is an indication to the IRS that the investment property is likely for property for personal use. One more thing: be sure to include depreciation for your investment property. It is required for rentals and is one more way to differentiate your investment property from personal enjoyment property.
These are the kinds of things you should consider and it is always a good idea to consult with your tax advisor for additional considerations. Treating that investment as a business will help ensure you are able to do the exchange and defer the tax, or else wind up paying the tax on the sale of your vacation home.
To see some great possibilities for a 1031 Exchange along our beautiful coastline, visit a Prudential Burroughs & Chapin Realty office.
Thanks to Realty Times
Monday, February 4, 2008
Do Your Homework: 1031 Tips
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1 comment:
Great information.
While a 1031 exchange is a powerful tool to assist in wealth preservation, it is not always suitable as people age. According to the experts, 15 - 20 % of all exchanges fail annually and this represents ~ $30 Billion dollars in busted exchanges.
I thought you and your readers might like to know there is another way to defer your capital gains taxes (and depreciation recapture tax) without buying replacement property. This strategy also applies to the sale of businesses and highly appreciated PRIMARY homes.
Please visit http://www.selltaxdeferred.com to learn more.
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