One of the quickest and most-proven ways to build wealth is to invest in real estate. Here in southwestern Montana, price appreciation continues to drive real estate investing. Investing in real estate may include owning:
· A personal residence
· Rental property
· Vacant land
· Commercial/industrial property
· Tenant-in-common property
Since World War II the federal government has promoted homeownership through the mortgage interest deduction. This tax incentive allows the homeowner to build investment equity, even when the investment is not appreciating and real estate continues to appreciate in southwestern Montana.
Through the 1997 Tax Relief Act every homeowner can take advantage of the capital gain tax savings that is available for his or her primary residence. Satisfying the minimum requirements of this program can result in significant tax savings when the property is sold.
The Internal Revenue Code 1031 allows a nonresidential investment property to be exchanged, deferring the capital gains tax. This deferral allows you to leverage the realized tax savings. These property exchange deferrals can be done indefinitely.
Every investment includes some measure of risk. You can minimize the risk by seeking good advice and being knowledgeable on the subject. A competent and knowledgeable tax advisor can assist you in taking advantage of the rules governing either your primary residence or an investment property.
There are many factors to consider in evaluating a potential investment and several ways to measure the financial benefit of each option. A qualified real estate advisor can help you consider and evaluate your options.
Rate of Return
You may use the Capitalization Rate (CAP Rate), Cash-on-Cash return, or the Gross Rent Multiplier (GRM). The Rate of Return...
Business investments should include such things as:
· Anticipated market appreciation
· Mortgage interest deduction
· Investments depreciation
· Expense deductions
· Capital gains deferrals
Capital Gains Tax
The 1997 Tax Relief Act allows an exclusion of the capital gains tax on the sale of your primary residence under the following rules:
- Couples filing a join tax return can exclude up to $500,000 of the capital gain on the sale of their primary residence, and single filers can exclude up to $250,000.
- The home must have been the primary residence two of the last five years.
- The exclusion is available once every two years.
- A primary residence contains basic living accommodations including cooking, sleeping and sanitary. It is the place where you live most of the time. It is evidenced by where your family lives, where you go to work. It is the address listed on your: auto registration, driver’s license, voter's registration and your tax return.
- Capital gains in excess of $250,000/$500,000 are taxed at the applicable tax rates (10%/20% federal, plus state tax).
Tax Deferred 1031 Exchange
The federal tax code 1031 allows investors to defer capital gain taxation by exchanging their current property with a replacement property, giving them more buying power on their new investment. Benefits of the tax deferred 1031 exchange include:
- Taxpayer's ability to transer the "earning power" of their tax dollars to another investment.
- Management-intense properties can be sold and replaced with more manageable properties.
- Equity from several properties can be consolidated into a single, more efficient property.
- Property owners who move to a new geographic location can relocate their investments.
Many investors are not aware that "Qualified Intermediary" companies often hold millions of dollars and yet are generally not regulated by any state or federal authority.
Before selecting a qualified intermediary and entrusting that company with your money, you should do some research to determine whether the company is able to provide you sufficient protection and financial security.
Some companies are members of the Federation of Exchange Coordinators, but does this provide you protection? Some offer bonding or E & O insurance, but exchange amounts often exceed the bonded level and the insurance claims are only paid if there is an error or an omission that meets the terms of the policy.
It is always better to do business with a well-established company with significant assets and excellent credit/business references. As in any business transaction, you should ask for and check references.
Questions to Ask an Intermediary
Where will the exchange funds be held? (If held in a bank, are you aware that the FDIC coverage is only for $100,000 per account?)
- In what kind of accounts are the funds invested?
- Are separate accounts created for each client?
- What are the requirements for the withdrawal of any exchange proceeds?
- Can a 3rd party Guaranty be provided? (Is this backed by a recognizable entity with an established track record and sufficient assets to cover potential loss of exchange proceeds?)
Qualified Intermediaries
Tenant-in-Common
|
