Upgrade Your Rental Home Tax Free ... But ...

Have you thought about upgrading your vacation rental property but were afraid that you'd have to pay capital gains on the sale? Nicely, Uncle Sam has created a way, called a '1031 Like-Kind Exchange', to make the trade, deferring any capital gains taxes until the final 'cash-out', which can be decades down the road. These 1031 exchanges have a number of rules and need to be executed correctly, but can save many thousands of dollars. Forbes.com ran an article called the 'Ten Things to Know About 1031 Exchanges'. It's good reading. Be sure to read #10 for vacation homes.

If you'd like to explore a 1031 Exchange for your Eastham property, please give me a call.

Selling One To Buy Another?

Are you considering an 'upgrade'? Will you sell an investment or rental home to purchase another? You need to consider the tax implications of such a sale. As a second, rental, or investment home your profits are likely taxable, unless you take advantage of an IRS rule known as a "like-kind" exchange. This is sometimes referred to as a IRS 1031 exchange.

Think of a 1031 exchange as being similar to a IRA rollover, except with real estate instead of securities. There are lots of rules that need to be followed and you will need to hire an 'exchange agent', but the benefits of a 1031 exchange can be enormous. Check out 1031 exchanges on the Parker-Scheer website...Here.

What Is A 1031 Exchange?

Any real estate property owner or investor of real estate, should consider a 1031 exchange when he/she expects to acquire a replacement "like kind" property subsequent to the sale of his existing investment property. Anything otherwise would necessitate the payment of a capital gain tax, which can exceed 20-30%, depending on the federal and state tax rates of your given state. To make it easy to understand, when purchasing a replacement property (without the benefit of a 1031 exchange) your buying power is reduced to the point, that it only represents 70-80% of what it did previously (before the exchange and payment of taxes).

'Exchanging' a property, represents an IRS-recognized approach to the deferral of capital gain taxes. It's very important for you to understand the components involved and the actual intent underlying such a tax deferred transaction. It is within Internal Revenue Code Section 1031 that we can find the appropriate tax code necessary for a successful exchange. Go to http://resources.robertsheldon.com/ for a few links to 1031 exchange companies, where you can learn about these exchanges. Please note that an important ingredient of a successful exchange is a qualified exchange agent.