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Avoid taxes on your real estate sales

by The Mountain Living Team

Did you know your home value grows tax free up to a certain amount?  Did you know income on the sale of an investment property or second home is taxed at a reduced rate from your ordinary income?  Whether you knew it or not real estate is a great wealth building opportunity. 

When you sell a home, if it is your primary residence, you can exclude $250,000 of the gain or $500,000 for those that file a joint tax return from your taxes.  That's a huge tax savings. and an incredible wealth building tool. See the IRS rules to see if you may qualify.

Recently we have seen home prices rise dramatically in the Summit County market.  It's been a similar story nearly everywhere nationwide.  If you are a home owner, you likely have had an increase in the value of your home.  If you're not selling, that gain doesn't mean much, but if you are, that increase in value could be 100% tax free.

If you own a second home or investment property that you are considering selling, your taxes on the gain could be minimal or deferred altogether.  If you're property is held more than one year, your gain can be considered a long term capital gain and taxed as a long term capital gain rate instead of included in your income and taxed at that, likely higher, rate.  If you are going to reinvest your gain into another property, you can defer your taxes altogether by doing a 1031 Exchange.  

We are not tax accountants, and as you know, every situation is different, but as real estate agents, we are aware of potential tax implications that can come with the sale of your property.  We can help you to identify those situations so you know what you should be talking to your CPA about.  Those conversations will help you determine your best strategy regarding the sale of your home.  Ultimately, that is our goal; to make your real estate experience the best it can be.

Colorado flood victims may qualify for extended 1031 exchange deadline

by Meredith Adams

Devestating floods across Colorado’s front range left 8 people dead and hundreds stranded.  Even now, people across the front range are dealing with uninhabitable homes, flooded basements, totaled cars and the muck that still remains after the flood waters have receeded.  With all the devestation, the president declared Colorado a major disaster area granting Coloradoans in 15 counties access to federal aid.  Another benefit to the president’s declaration was an extension for those in the middle of 1031 exchanges.

A 1031 exchange allows owners of investment properties the ability to sell one property and “exchange” it for another while deferring the tax due on the gain.  There are strict rules imposed on 1031 exchanges.  If the rules aren’t followed, the owner could be liable for the taxes due.  One of the  rules imposed is that the exchanges happen within a 180 day period.  As you can imagine, if your house just floated down river, completing a sale within the specified timeframe could be difficult. 

According to Section 17 of the Internal Revenue Bulletin 2007-34 a Presidentially declared disaster area grants a 120 extension to those that haven’t yet identified their replacement properties or closed on their sale.  On September 16th, the IRS announced the 15 counties identified in Colorado’s disaster area would qualify for this extension.  Those 15 Colorado counties are Adams, Arapahoe, Broomfield, Boulder, Clear Creek, Denver, El Paso, Fremont, Jefferson, Larimer, Logan, Morgan, Pueblo, Washington and Weld.  You don’t have to live in the disaster area to be eligible.  If your qualified intermediary’s office or one of your exchanging properties is in the disaster area you can still qualify. 

If you think you may qualify for this 120 day extension talk to your QI (qualified intermediary) and make sure you do.  You don’t want to use the extension, then find out you weren’t eligible and wind up owing the tax you were expecting to defer.

More information about 1031 Exchanges on your Summit County vacation home.

The new tax bill is designed to help first time home buyers buy a home and should help to improve the real estate market by giving them tax credits when they buy their first home.  For more details on the bill go to http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2008/07/housing-bill-al.html  She has a very complete description of its provisions. 

However, there is always payback.  When Uncle Sam offers one group of people a tax break, someone has to pay for it, and in this case, the second home owner will be part of it.  There used to be a big loophole in the tax law that allowed people doing a 1031 tax deferred exchange out of an investment property to buy a property that they might like to live in permanently, rent it for a while, and then turn it into their permanent primary residence when they retired.  That loophole was tightened up recently when new legislation was passed mandating that you had to have owned the home for at least five years and live in it for two of the five years before selling.  Now according to Kay Bell, who writes the blog mentioned above,

…..under the new law, sellers will not be able to exclude gain for those times that the property was not used as the owner’s main residence, for example, when it was used as a rental or vacation property. This provision will affect homes sold on Jan. 1, 2009, and thereafter.

For more information on Summit County vacation homes, subscribe!

6 rules that will save you money

by Joanne Hanson

When buying or selling certain properties, you can defer the taxes on the gain by doing a 1031 exchange. When you sell one property and buy another, it is possible to defer all taxes on the gain if you follow these six rules to meet the stringent IRS regulations.

The IRS Rules for Exchanges

  1. Qualified Intermediary (QI). The IRS mandates that you use a QI to prepare the legal documents for your exchange. Because the QI must be independent, it cannot be your friend, employee, broker, or even your accountant or attorney. The QI also holds your money, so that you do not have access to it.
  2. Proper title holding. You must purchase and take title to your new property exactly as you held title to your old property.
  3. Reinvestment Requirement. To defer all of your capital gain tax, you must buy a property equal or higher in value than the one you sold. Also, you must reinvest all of the cash proceeds from your sale.
  4. Real Property Use. Both your old and new properties must qualify as investment or business use. If both properties pass this test, you can exchange nearly any type of real estate.  Read a blog post about a recent court ruling on 1031 exchange treatment of vacation properties.
  5. 45 Day Identification Period. You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.
  6. 180 Day Exchange Period. From the sale closing date, you have 180 days to close on the purchase of one or more properties from the 45-day list. Again, there are no exceptions to this deadline.

Courtesy of The 1031 Exchange experts.

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Photo of Jason & Meredith Adams Real Estate
Jason & Meredith Adams
Mountain Living Real Estate
101 E. Main Street, #109 / PO Box 4115
Frisco CO 80443
888-666-0844