|
  |
|
|
Real Estate Investor Benefits
One of the main reasons real estate investments are so popular - and profitable- is that the federal law allows investors to shelter portions of their incomes from taxation. Some of the more common methods of shelter for real estate profits are exchanges, depreciation, and installment sales.
The taxable gain on real estate held for investment is determined by two factors, the basis and the adjusted basis.
Basis usually refers to the initial cost an investor pays for a parcel of real estate. Generally, the adjusted basis represents the basis plus the cost of any physical improvements to the property, minus depreciation. The gain is the differene between the adjusted basis and the net selling price (less any depreciation for tax purposes claimed on the property).
This article is designed to introduce the reader to general tax concepts - a tax attorney or CPA should be consulted for further details on specific regulations. Internal Revenue Service regulations are subject to frequent change: again, a tax expert should be consulted for up-to-date information.
A real estate investor can defer taxation of capital gains by making a property exchange, in other words, exchanging one property for another. Tax laws generally provide that an investor's capital gains are not taxed when he or she exchanges the property for real estate of like kind with the same or greater selling value. (This is officially referred to as a 1031 Tax Deferred Exchange.) The tax is deferred not eliminated. If the investor ever sells the property (or subsequently exchanges properties), he or she will be required to pay tax on the difference between the sales price and the carryover basis. Therefore, an investor can keep exchanging upward in value, adding to his or her assets for a lifetime without ever having to pay any capital gains tax.
To qualify as a tax-deferred exchange, the properties involved must be of like kind- basically, real estate for real estate, personal property for personal property. Any additional capital or personal property included with the transaction to even out the exchange is considered boot and is taxed at the time of the exchange. In addition, the value of the boot is added to the basis of the property with which it is given in exchange to form a new basis for the investor giving the boot. To the extend that liabilities are given up in excess of the liabilities assumed, the difference is taxed at the time of the exchange and the basis is increased by the gain.
Deprecition, also referred to as cost recovery, is a statutory concept that allows an investor to recover in tax deductions the basis of an asset over the period of its useful life. Depreciation is an accounting concept and may have very little relationship to the actual physical deterioration of the real estate. Depreciation deductions may be taken only on improvements - not the total value of the real estate, and only if they are used in a trade or business or for the production of income. The value of the land cannot be depreciated - technically, it never wears out or becomes obsolete. In addition, an individual cannot claim a depreciation deduction on his or her own personal residence.
An investor may defer federal income tax on a capital gain, provided he or she does not receive all cash for the asset at the time of sale, but instead receives payments in two or more periods. This transaction is an installment sale. This method of reporting is now automatic, unless the taxpayer elects not to use it. As the name implies, the seller receives payment in installments and pays income tax each year based only on the amount received during that year. (This can be accomplished by selling through a contract for deed, purchase - money mortgage, or similar instrument.) Besides avoiding tax payments on money not yet collected, the installment method often saves an investor money by spending the gain over a number of years. The gain may be subject to a lower tax than if it were received in one lump sum. Internal Revenue Service regulations on installment sales are quite complicated, and the sale should be planned with the seller's tax advisor. |
|
 |
|
No reactions yet.
Please login or sign up to rate this intel.
Please login or sign up to add a comment.
The copyright for this content entitled "Real Estate Investor Benefits" has been specified by the contributor as:
All Rights Reserved
This content may not be copied, distributed or adapted by anyone under any circumstances.
|
|
May, 2012
2008
January, February, March, April, May, June, July, August, September, October, November, December
2009
January, February, March, April, May, June, July, August, September, October, November, December
2010
January, February, March, April, May, June, July, August, September, October, November, December
2011
January, February, March, April, May, June, July, August, September, October, November, December
2012
January, February, March, April, May
|
|
Not a member yet?
Qondio is a powerful network for making it online. If you have a website to
promote, we can help.
Sign up and get in on the action.
|
|
Welcome to Qondio! Discover the awesome power this network can deliver by going to our About page. Or you could skip straight to the Sign Up form.
|
|
