Tag Archives: capital gains

Strategies for Sellers to Defer Capital Gains Taxes

Strategies for Sellers to Defer Capital Gains Taxes
1031 Exchanges, Delaware Statutory Trusts & Opportunity Zones

Presented by The Skinner Team |KW Top of The Rockies

This information may be advantageous for you when it comes time to sell your investment property. Each of these strategies outlined below can be great options to defer or potentially dissolve the capital gains tax you might incur from selling a property. A 1031 is the most common thing sellers do to help defer capital gains, however, there are two additional options within a 1031 that are not widely known but are also excellent strategies you may want to consider. 

IRC Section 1031

Section 1031 of the Internal Revenue Code (IRC) allows a taxpayer who owns property held for investment or used in a business to sell a property and defer paying capital gain taxes and depreciation recapture taxes if the taxpayer purchases a “like-kind” replacement property. 

What are the benefits of a1031 exchange?
A 1031 exchange can be a great tool if the owner wants to:

  • leverage into a more valuable property
  • purchase a property with better cash flow
  • diversify into other properties
  • consolidate into one larger replacement property

What is like-kind property?
Like-kind property can include, but is not limited to, virtually any type of real property, provided it is held for investment or used as a business:

  • single-family long term or short term rental
  • multifamily rentals
  • industrial or commercial property
  • land 

How much time do I have to execute a 1031 exchange?
Timelines become important went executing a 1031 exchange

  • Taxpayers must identify the potential replacement properties (usually 3 although in some situations it may be more) within 45 days from closing on the sale of the relinquished property
  • Taxpayers have 180 days between the sale of the relinquished property and the closing of one of the identified replacement properties

Keep in mind, paramount to any exchange is a competent and experienced qualified intermediary. Not following the proper rules or not using a qualified intermediary can invalidate an exchange. You will need to have your intermediary lined up before you sell!

For more information on 1031 Exchanges:

Delaware Statutory Trust

One option within a 1031, especially if you no longer wish to be a landlord or are unable to find a suitable replacement property, is to do a 1031 exchange into a Delaware Statutory Trust (DST). You would need to identify a trust as one of your replacement options and then you would move your funds into the trust of your choice.

What is a DST and who can utilize it?

A DST is a type of trust formed under Delaware law. A DST allows investors to own undivided fractional ownership interests in professionally managed institutional grade real estate offerings around the United States. A DST creates an indirect way of owning investment real estate. 

The types of real estate owned by a DST may include:

  • Class A multi-family apartments
  • Medical buildings or Hospitals
  • Distribution centers
  • Manufactured home communities
  • Senior Living
  • Student Living
  • Storage portfolios

What are the advantages of DSTs?

  • Smaller minimum investment and access to ownership of high-grade commercial properties that would be otherwise difficult to acquire individually
  • Passive ownership with no day-to-day headaches of typical real estate ownership
  • The trust is not considered a taxable entity and, therefore, all the profits, losses, etc. are passed through directly to the investors
  • Investors participate in depreciation and amortization in the same way an investor who owned a 100% ownership interest in his or her own real property would
  • Can be utilized on your list of 1031 identified properties as a backup to ensure all the proceeds from the sale of the relinquished property achieve full tax deferral

For more information on Delaware Statutory Trusts:

https://apiexchange.com/delaware-statutory-trust-dst/

The top 10 reasons investors are jumping into DSTs:

https://www.kiplinger.com/real-estate/real-estate-investing/602456/top-10-reasons-real-estate-investors-are-jumping-into-dsts

Opportunity Zone Investments

A further option is to invest into an opportunity zone. An opportunity zone essentially lets you dissolve most or sometimes even all of your capital gains. There are two ways to accomplish this, either purchase a property in an opportunity zone or buy into a DST type fund that owns in opportunity zones.

What is an Opportunity Zone?

The federal government designates some disadvantaged communities as opportunity zones. Through the 2017 Tax Cuts and Jobs Act, opportunity zone tax benefits were created. The goal of these incentives is to encourage long-term investments in low-income neighborhoods through private investment. With these tax incentives in place, the federal government hopes to create an opportunity for investors while pushing more possibilities into disadvantaged communities. Through opportunity zones and opportunity funds, which are the investment vehicle, investors can take advantage of tax benefits as a reward for tackling investments in low-income neighborhoods.

What are the benefits of Opportunity Zones?

  • Tax deferral from capital gains taxes
  • Investors who chooses to invest in an opportunity fund will receive a 10% step-up basis after 5 years of investing in the fund before 2026***
  • After 10 years, tax deferred becomes tax free, creating a great option for long-term investors***
  • There are over 8,000 Opportunity Zones (however, it’s important to do your research on which makes the most sense for you)
  • You have the have the opportunity to purchase either a property directly in a qualified Opportunity Zone or purchase into a Opportunity Zone Fund (much like a DST)

*** Maximum benefits will be determined based on when you purchase into an opportunity zone.

Learn more about opportunity zones:

Are opportunity zones for you? 5 Questions to ask yourself:

Are Opportunity Zones for You? 5 Questions to Ask | Kiplinger

 

Don’t hesitate to reach out if you have any questions!

Anne Skinner, SASRSPSCNE
Lead Broker
Keller Williams Top of the Rockies Realty
605 Main St, #103
Frisco, CO 80443

Hey, Homeowners! These Little-Known Tax Deductions Can Save You Thousands

Be sure to get the most back on your taxes this year. Renee Morad from Realtor.com outlines some important tax information for homeowners. 


 

Hey, Homeowners! These Little-Known Tax Deductions Can Save You Thousands

By
Renee Morad

Sawayasu Tsuji/Getty Images

You probably already know that owning a home comes with some sweet tax benefits, like the mortgage-interest and property-tax deductions. But did you know there’s a whole list of other homeowner-related tax breaks that you might be leaving on the table?

We’re not talking chump change, either. Homeowners already save an average of $3,000 a year in taxes from mortgage-interest and property-tax deductions, according to the National Association of Realtors. When you add in some of the lesser-known homeowner tax breaks, you could really be amping up the savings—and beating the IRS at its own game.

Back in December, Congress passed the Protecting Americans From Tax Hikes Act of 2015, which extended many exemptions that were about to expire and made others permanent. But to reap the benefits, you first have to know about them.

So, here we go! Check out these common—and not-so-common—homeowner deductions that you should take advantage of this year:

1. Mortgage interest deduction

If you’ve taken out a loan to buy a house, you can deduct the interest you pay on a mortgage, with a balance of up to $1 million. To access this deduction, you will have to itemize rather than take the standard deduction. The savings here can add up in a big way. For example, if you’re in the 25% tax bracket and deduct $10,000 of mortgage interest, you can save $2,500.

Of course, there are some limitations. For example, if you’re helping a family member pay his or her mortgage, you can’t deduct that interest on your tax return.

2. Private mortgage insurance

Qualified homeowners can deduct payments for private mortgage insurance, or PMI, for a primary home. Sometimes you can take the deduction for a second property as well, as long as it isn’t a rental unit. Here’s the catch: This only applies if you got your loan in 2007 or later.

Another restriction: This deduction only applies if your adjusted gross income is no more than $109,000 if married filing jointly or $54,500 if married filing separately.

3. Property taxes

You can include state and local property taxes as itemized deductions. An interesting note: The amount of the deduction depends on when you pay the tax, not when the tax is due. As a result, paying property taxes earlier could have a positive impact on your return.

4. Capital gains on a home sale

The dreaded capital gains tax can be avoided when the gain from selling your personal residence is less than $250,000 if you are a single taxpayer or $500,000 if you are a joint filer. To qualify, you must have owned and used the home as a primary residence for at least two years out of the five years leading up to the sale.

5. Medical improvements

If you’ve made improvements to your home to help meet medical needs, such as installing a ramp or a lift, you could deduct the expenses—but only the amount by which the cost of the improvements exceed the increase in your home’s value. (In other words, you can’t deduct the entire cost of the equipment or improvements.)

“A lot of this comes down to fact and circumstance,” says Gil Charney, director of The Tax Institute at H&R Block. “For example, if you’ve recently installed a heated therapy spa or hot tub in your home, you may be able to deduct the expense if there’s also evidence that, say, a physical therapist visits your home three times a week and you’re over a certain age.”

6. Home office

If you have a dedicated space in your home for work and it’s not used for anything else, you could deduct it as a home office expense.

“It doesn’t have to be an entire room,” Charney says. “It can just be a dedicated space.”

7. Renting out your home on occasion

If you rented out your home for, say, a major sports event like the Super Bowl or the World Series, or a cultural event such as Mardi Gras, the income on the rental could be totally tax free—as long as it was for only 14 days or fewer throughout the course of a year.

8. Discount points

Discount points, which are paid to lower the interest rate on a loan, can be deducted in full for the year in which they were paid. In addition, if you’re buying a home and the seller pays the points as an incentive to get you to buy the house, you can deduct those points, Charney explains.

9. Energy-efficiency tax credit

You can take advantage of an energy-efficiency tax credit of 10% of the amount paid (up to $500) for any green improvements, such as storm doors, energy-efficient windows, and air-conditioning and heating systems.

10. Loan forgiveness deduction

If you’re the owner of a foreclosed or short-sale home, you can take advantage of mortgage-debt forgiveness. For example, if you make a short sale of your primary home at $250,000 but owe $300,000 on your mortgage, the lender will forgive the extra $50,000 owed—and you don’t have to pay taxes on that amount.

For more tax tips, check out IRS Publication 530 for a list of what homeowners can (and cannot) deduct.