- Real estate is the most tax-favored investment class in the United States, and one of the best choices you can make is to engage in a 1031 property swap. The name comes from section 1031 of the Internal Revenue Code. If you sell your current property, hopefully at a nice profit, you can invest the proceeds in another property of equal or greater value, deferring your capital gains tax. Theoretically, you can defer taxes forever if you never sell the new property or, at some point in the future, you sell and roll up once again into an even bigger property.
A few strict rules must be observed when contemplating a 1031 swap. The net proceeds must be held by a neutral intermediary. In addition, you must formally identify the new real estate that you intend to purchase within 45 days of the sale and take title to the new property within 180 days. - You can defer capital gains taxes if you opt for an installment sale. This means you sell the property but carry the mortgage yourself. The buyer will be paying you instead of a bank. Under an installment sale, you pay a portion of the tax you owe each year.
Giving your real estate to charity can get you out of paying capital gains tax, but you also don't receive any money for the sale of your property -- you are giving it away. Charitable donations of real estate are subject to complex rules and it would be a good idea to consult with an accountant or tax lawyer about the ramifications before proceeding. - Here's an interesting solution that allows you to reduce estate taxes by giving the property to family members. To do this, proceed as if it were an actual sale -- have the buyers (your children) sign a promissory note for the sale price of $500,000. The owners, you and your spouse, hold the mortgage. Each year, you and your spouse can each donate up to $11,000 as a gift to each family member. For two children, that adds up to a $44,000 annual reduction in the mortgage balance. Eventually, they'll own it free and clear having paid nothing and with no adverse estate tax consequences.
- Books describing a multitude of tax deductions available to real estate owners can be purchased online or at your local bookstore. Here are ten excellent deductions to help you start saving while you continue your research:
1. Interest on a mortgage used to either buy or improve property.
2. Depreciation: rather deducting the entire cost of a real estate purchase at once, you can deduct a portion of it every year.
3. Repairs: fully deductible in the year the work was done as long as the repairs are ordinary, necessary and reasonable. Think guttering, floors, broken windows, plumbing, etc.
4. Local travel: you can either deduct actual expenses or mileage when traveling by car to carry out landlord activities such as meeting a tenant about a complaint or going to the hardware store for supplies.
5. Long-distance travel: standard business travel deductions apply (hotel, airfare, meals) if you are the road to manage your rental property.
6. Home office: if you have a space in your house dedicated to your property management activities, you can deduct a percentage of expenses, including house payment, utilities, phone and Internet.
7. Wages paid to employees or independent contractors are deductible.
8. Losses: money spent to repair or replace items lost due to natural disaster, fire or theft can be deducted.
9. Insurance: you might carry a host of insurance on a rental property (fire, theft, flood, liability) and the premiums are all deductible.
10. Professionals: if you hire professionals (property managers, attorneys, accountants) their fees are tax-deductible.
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