Taxes and 1031 Exchanges

Capital Gains Taxes

- differ from general Income Taxes in that it is a profit made from selling assets (stocks, bonds, real estate) rather than an income based on wages.

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Sale of Residence

- This is a common area to misunderstand the tax laws. You may qualify to avoid all or part of the Capital Gains Taxes from the money you make on the sale of your home. There are certain requirements in order to qualify. The IRS has an “Ownership and Use Test” to see if you can avoid part or all of the Capital Gains taxes associated with your hame sale.

The tests are:

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

• Owned the home for at least two years (the ownership test)
• Lived in the home as your main home for at least two years (the use test)

- In Plain English - if you owned and lived in the property as a main home for a combined total of 2 years within the last 5 you can qualify.

(if you qualify both tests than you can follow the "Gain" rule below)

Gain

If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

- In plain English - That means You can eliminate up to $250,000 of PROFIT(so total sale price can be higher than that) for a single person filing and up to $500,000 on a joint return for married couples.

• If you can exclude all of the gain, you do not need to report the sale on your tax return. :)
• If you have gain that cannot be excluded,(any profit amount above the Gain limits)it is taxable. Report it on Schedule D (Form 1040)

-There are some limits, if you depreciated the home because of use as a rental property; you cannot exclude the amount already depreciated.

For more information click here: http://www.irs.gov/publications/p523/index.html

1031 Exchange

This is only for properties used as investments, not personal homes. A 1031 exchange is a way to DEFER Capital Gains Tax. The IRS will eventually get the money owed for property sales. 1031s are used by investors who wish to sell one investment property and purchase an investment property of a like kind. There are very stringent rules to follow in order to do this. You have to file for a 1031 prior to sale, you may not handle the money from the sale, you can either do a direct exchange or use a company that services 1031 exchanges to handle the money for you.  You MUST notify the IRS of the property that you wish to purchase within the allotted time period.  For more information go here: http://www.realtor.org/libweb.nsf/pages/fg408