The real estate market and general economy have been the subject of a great deal of negative news lately. While a tax increase is never good news it may cause a little run in the markets this fall. There may be an increase in the year end transactions this year due to the year end sunset provisions in the law that lowered capital gains to 15% back in 2000. In 2011, the federal capital gain rate will increase to 20% automatically if Congress takes no action to extend the 15% rate decrease. It seems unlikely that Congress will do so. In addition, in 2013, there will be a new tax of 3.8% on unearned income, which will include income from the sale of real estate that will be imposed on those individuals with a gross income of more than $200,000, or married couples with an aggregate gross income of $250,000.00. Therefore, by 2003, most middle and high income earners will pay a 23.8% federal capital gains rate for sale of investment property. Combined with many state taxes, the rate will clearly be above 25% for many taxpayers in most places.
With tax increases looming, it is more important than ever to seek advice from your tax advisor long before you sell investment property. Our company engages in many of these discussions with accountants and attorneys that are trying to help their clients make thoughtful decisions. In fact, in a recent case, we were able to help a client find a way to avoid a large capital gains tax, and even help them with some retirement planning issues in the process. .
Mr. and Mrs. Marks approached one of our attorney clients in 2002 about selling a long term vacation property that had primarily been used as a second home. The property would sell for about 2.6 million, and since the basis in the property was under $200,000.00, the combined state and federal taxes would have been over $500,000. The couple was not thrilled about paying the tax, because after paying off some other debts with proceeds of the sale; they would not have had enough money left to retire on, along with their other assets. That attorney contacted us to ask some questions, which led to a meeting with the parties. In that meeting, we helped construct a plan that involved, converting the property to a full time rental for at least 3-5 years. The parties enlisted a realtor who was easily able to rent the property at a rate that nearly covered their yearly real estate taxes and carrying costs. Also, as suggested, they also refinanced the property in order to consolidate some unrelated debt. This would also benefit them 8 years later when they did the 1031 exchange.
Due to the changes in the real estate economy, the couple decided to hold off on selling the property in 2007, because the market had changed for the worse. This year, they listed the property, and got a strong offer of 2.5 million. Our company was able to introduce them to a commercial realtor who specializes in triple net lease commercial properties, and through that realtor’s efforts, they found a very strong, stable triple net lease property. They were able to do a 1031 exchange into the building by using the majority of the exchange proceeds, and now they have an investment property that is throwing off $105,000.00 of rental income and will not only help fund their retirement, but will also be left to their children when they pass on.
Is your IRA benefiting you the best that it could? Take control of your IRA and maximize its productivity... In real estate. We all know its a buyers market, here is another way to cash in on a rebounding real estate market while stimulating your IRA funds at the same time. Self Directed IRA for Real Estate at Capital IRA.
