Wednesday, March 12, 2008

Sell Property Now While Capital Gains Is Low, Or 1031 Exchange?

It is very possible that we will have a Democratic President next year, and with them an increased capital gains tax rate. From the sound of things, Barack Obama or Hillary Clinton were plan to let the Bush tax cuts expire, which includes the lower (15 percent) capital gains rate.

Clinton would probably just let them expire, and we would return to the pre-Bush 20 percent rate), but Obama plans to raise it above the pre-Bush rate, and could attempt to change the legislation prior to the Bush tax cuts’ expiration at the end of 2010.

The Wall Street Journal pointed out that this uncertainty should compel investors to make necessary arrangements now to maximize their returns. If an investor knows that he or she is going to need the money sometime in 2009, for example, it might make sense to look at selling the property this year to avoid the potentially higher capital gains rates. Considering the struggling real estate market, I wouldn’t suggest this strategy unless you need the money out of the property..

If you don’t need the money and if you later decide that you want a different property, then you can 1031 exchange into a different investment property, and defer those taxes. The beauty of the 1031 is that you can keep deferring those taxes until you die, and when that happens: A) You won’t care about taxes anymore, and B) Your heirs will take possession a the new higher base value, so they don’t have to pay the taxes either.

1031 exchanges can be a little confusing when you try to figure out all of the timelines and regulations, but once you understand the basic concept, it really isn’t all that difficult. Every real estate investor should at least be aware of 1031 exchanges, and if you are not familiar with how they work, then I suggest that you read our article: Defer Taxes with 1031 Exchanges. . It won’t always make sense nor will it be possible to use them in every situation, but 1031s can save investors thousands in taxes if used properly.


Jeff Kornfeld said...

Good morning.

Regarding your article, deciding to sell a property that could qualify for a 1031 exchange and paying the tax now versus down the road because the tax rates MIGHT increase is very short sighted.

Please understand I am not attacking you I am pointing out the flaws in that to investors.

Many Americans have amassed great wealth in real estate by deferring their tax obligations and putting that money to work on their behalf (as opposed to Uncle Sam). It’s like getting an interest free loan from the IRS.

While a 1031 exchange is a powerful tool to assist in wealth preservation, we realize it is not always suitable as people age. Many people would like to divest their real estate holdings (or other highly appreciated asset) as they head into retirement. Investors will be amazed how much more wealth they will accumulate by deferring their taxes and not paying it upfront regardless of the tax rate.

Most people are not aware they can defer their capital gains and depreciation recapture tax without being forced into buying replacement property (in a 1031 exchange). In addition, they can have very flexible reinvestment options that are designed to meet their goals and objectives.

Normally, we refer people to our website to learn more. Please feel free to contact me if you'd like to learn more or, see real numbers proving this point.

Eric Ames said...

Thanks for the comment Jeff, I have never heard of this strategy before. I did a quick Google search though and it appears there is quite a debate going on right now about the validity of it. It is a new strategy that has never been "officially" tested in court, and some professionals aren't ready to jump on the bandwagon quite yet. Here is a good link I found that talks about some of the concerns:
On the surface though this program sounds great for investors, so long as it is in fact legitimate. I think it is something that we (NuWire) will certainly look into further and very possibility write an article about our findings. Anyway thanks for the comment, I'm very intrigued.