Depreciation: The Gift With a Catch

When it comes to selling investment property, depreciation is a gift with a catch. When you own the property depreciation tax deduction is a wonderful thing. The IRS essentially lets you pretend that your property is losing value at an even rate over 27 1/2 years (39 years if it’s a commercial property. You get to take that pretend loss as a tax write off – Bonus!!!

But wait. The IRS wants that tax break back when you sell the property. It is one of those “I’m from the government, and I’m here to help” kinds of things. And it gets even worse. Even if you have never taken the depreciation allowance tax benefit on your tax return, the IRS will make you pay back what you could have taken when you sell. That’s how naughty it is. In the words of Lord Bramwell “Like mothers, taxes are often misunderstood but seldom forgotten.”.

In comes the knight on shining horse – the 1031 exchange. When you complete a 1031 exchange you get to defer the tax on all gain and the dreaded “depreciation recapture”.

A 1031 exchange allows you to defer all capital gains tax and depreciation recapture when you sell and purchase investment property. The key to the 1031 is that you must use a 3rd-party qualified intermediary to manage the 1031 process. And they must be in place prior to the close of your sale—you cannot simply sell and reinvest. It is this intermediary who can guide you through the wilderness of IRS rules around tax deferral, so you don’t get burned by a helpful IRS.

Which U.S. Territories Qualify for a 1031 Exchange?

From the U.S. Virgin Islands to American Samoa, the United States administers quite a few territories. And for real estate investors it is important to keep in mind that while all of these territories are most certainly part of the U.S., they are not all treated in the same. So which islands contain property that is eligible for a U.S. to U.S. 1031 exchange?

There are three:

  1. Guam
  2. U.S. Virgin Islands
  3. Northern Mariana Islands

In 2008, the Treasury solidified these three islands as identical in treatment. Areas that are not on the list of coordinated territories do not contain property eligible for a 1031 exchange. However, with islands such as American Samoa and Puerto Rico now considered a Qualified Opportunity Zone, there is more than one way to defer capital gains taxes.

To learn more about Qualified Opportunity Zones continue on to here.

3 Benefits of Homesteading Your Primary Residence

Homesteading your principal residence has many advantages. Below are three reasons why you should definitely consider checking to see if your property qualifies for the homestead tax exemption.

1.   Tax Exemptions

Everyone loves a property tax cut. Homesteading a house in Florida grants you a property tax exemption that is based on the assessed value of your property. It is currently possible to have up to $25,000-$50,000 deducted from your property’s assessed taxable value.

2.   Protection of Your Property

A property that has been homesteaded is protected from forced sale to satisfy debts for personal loans. This means that if you wind up owing any credit card companies an enormous amount of money, they are forbidden from coming after your home. However, homesteading your property does not protect you from foreclosures for not paying your property taxes, mortgages, homeowners association fees, and construction fees. Even with a shield, it is always a good idea to pay off your debts in a timely manner.

3.   Protection for Your Family

Homesteading your property guarantees that your family will still have a home after you are gone. Homesteading ensures that if you are married and pass away, your surviving spouse and children will inherit the estate. Even if a will states otherwise the operation of law will protect your family from being displaced from their home. The signature of both spouses is required on all documents in a homesteaded property. Even if the property is titled in one spouse’s name only.

To learn more about how you can utilize the power of a 1031 Exchange visit The 1031 Investor.

What Are Florida’s Requirements for the Homestead Tax Exemption?

Homesteading your property in the state of Florida is a great way to cut down on property taxes and protect your home from creditors. But before you start filing the paper work it is important to make sure that the house you are homesteading meets all the requirements.

Only your principal residence may be homesteaded. The size of the property that may be homesteaded varies depending on where your house is located. If it is located within city limits, only half an acre may be homesteaded. However, if the house is located outside of city limits up to 160 acres may be homesteaded.

To be considered eligible when filing for the homestead tax exemption, you must have held the title to the property since the first of January. If you are applying for the first time, you must file an application with the county property appraiser’s office on or before the first of March. If your application has not been filed by March, the homestead exemption will not take effect until the following year. The procedure varies from county to county. Some counties will allow homeowners to submit the initial application throughout the year. Always make sure to talk to a local expert in your county.

To learn more about how you can utilize the power of a 1031 Exchange visit The 1031 Investor.

How Much Do I Need to Reinvest With a 1031?

When you begin hunting down replacement properties for your 45 day list, it is important to keep in mind how much you need to reinvest while carrying out a tax deferred exchange. The IRS has a two-part requirement laid out for reinvestment with a 1031. The first one is that in order to defer all taxes you must purchase at least as much as your “net sale”, the contract price minus closing costs or the total left before any mortgage is paid off. The second one is that you must use all the “net proceeds” in your next purchase. This means that if there was a mortgage, subtract the mortgage that was paid off and the difference is your net proceed.

If you choose to take cash out or purchase less than what you sold, the unused proceeds will become taxable to the IRS. The proceeds that were reinvested in your exchange will remain sheltered from capital gains tax. You have an immense amount of freedom when it comes to allocation of your proceeds. Just because you sold a single-family home, doesn’t mean that you need to reinvest in another single-family home. A 1031 is also not necessarily a one to one process, it is the valuations that are the key. If you want to sell a single property and reinvest in multiple properties, you have the power to do so. Just remember that if you wish to defer all capital gains tax you will need to make sure that your reinvestment uses all of your proceeds.