Property Taxes Saving Techniques

Buy or Sell Real Estate After the 1997 Tax Act: A Guide for Homeowners and Investors

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Of all the areas affected by the 1997 Taxpayer Relief Act–the most sweeping tax reform agenda in years–perhaps the greatest impact will be in real estate. From the capital gains reduction on investment property to the new 0,000 exclusion on the sale of residences, the revisions are numerous–and complex. This concise, easy-to-understand book clarifies and simplifies these changes for you, explaining exactly what the revisions are, what they mean for your holdings, and–perhaps most importan

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What You Should Know About Home Selling And Capital Gains

There is a way around capital gains taxes, and it’s through home sales exclusion. Homeowners everywhere know about the tax breaks the US government is serving up, especially the ones on tax deductions and mortgage interest. Home sellers stand to benefit big time. Majority of them will not owe the IRS (Internal Revenue Service) a cent.

Some Info On Capital Gains And Selling Your House

Selling your main residence can earn you profits amounting to as much as 0,000. That’s as a single owner. You can make two times that amount if married. All these come with no capital gains taxes owed.

In the past (pre-May 7, 1997), people escaped having to pay taxes on profits made from home sales one way: using the same money to purchase other, pricier homes within a couple of years. Sellers age 55 and older had another option. They could opt for a one-time tax exemption offer in profits worth nearly 5,000.

The passing of the 1997 Taxpayer Relief Act eased the home sale tax load borne by the millions of homeowner taxpayers. Per-sale exclusion amounts seen today, replaced the once-in-a-lifetime or rollover alternatives.

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Who Is Qualified? This is determined through the “USE” checklist or test. Exemptions restricted to every couple of years. People are only exempted from home sale capital gains taxes once per two-year period.

1. USE Test – You’re qualified for home sale capital gains tax exemption if you owned and inhabited a residential place for two of the last five years prior to selling, but there can be interruptions in the timeframe involved. You can reside in the house during year 1 and rent it out for the next three years, move back in for year 5 and still be eligible.

2. Failing the USE Test – If you flunked the USE test, there’s still hope. You can avail of prorated exclusions on capital gains, provided your home was sold because you switched jobs, had health reasons or other unexpected circumstances. Say you lived in a house for just one year because of employment changes. This entitles you to an exemption of 5,000 or half the original 0,000 exemption you would’ve gotten.

3. Nursing home exception – Although ordinarily you’re required to own and reside in the property for two of the most recent five years, this requirement can be driven down to just one of the five years for those who wind up living in nursing homes. Even better, the length of stay in nursing homes is credited to the USE test, treating the nursing home much like the original house.

If you’ve been toying with the idea of selling your house for months, but are a few months shy of the two-year requirement, hang in there just a bit more until you complete the entire 24 months. It will mean bigger capital gains for you.

This article is just general information on capital gains tax on real estate sale. You should always consult with a tax person or an attorney at law on any tax matters or questions you may have on capital gains taxes on real estate.

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MAKING THE BEST OF A BAD SITUATION:

How to Defer Capital Gains Tax Liability on a Commercial Foreclosure

Unsuspecting commercial investors are driving to the bank to turn in their keys on projects that did not workout as planned and waking up the following year with an unexpected tax headache. The discharge of the loan can result in a capital gains tax liability. Not only did the clients lose whatever equity they had in the property, but they also face capital gains tax liability for simply how they transferred the property to the bank!

Individuals confuse the property’s tax impacts with the property’s economics. However, these two calculations are different. For tax purposes gain or loss equals the difference between the transfer price to the bank and the adjusted basis. Thus, if you bought a property in 1987 for 700k (your cost basis) and it has been depreciated and now has an adjusted basis of 0K, and it is foreclosed with a 950k loan, this transfer without a 1031 exchange results in a taxable gain of 0K, i.e. 0k transfer price minus the 0K adjusted basis.  ES Group is a Qualified Intermediary pursuant to Internal Revenue Code §1031.                                                                                                              ES Group corresponds with each client’s attorney and/or tax advisor and forwards legal documentation, as requested, so that the Internal Revenue Code §1031 rules and regulations are thoroughly understood. ES Group prepares the necessary documentation- Exchange Agreements, Assignment Agreements, Notice of Assignments, and oversees each closing to assist in proper §1031 procedures. ES Group provides guidance, information and critical timelines throughout the entire exchange.

Convert income into capital.
Capital gains tax was introduced in 1965 and subsequent finance acts were consolidated into the Taxation of Capital Gains Act 1992.

I find that when taxpayers sell assets they are drawn immediately to considering capital gains tax. The first option to tax is as trading profits rather than capital gains. The deciding factor is whether or not the intention at the time of purchase is to make a profit from the resale, with or without improving the asset, within a short time scale.

Capital profits can also be taxed as income (S752 ITA 2007).

Ensure that when you consider the taxation of the sale of an asset you make sure you establish the correct method of charge rather than assuming the liability will be to capital gains tax. In your planning also remember inheritance tax.

Residence

Non-residents are chargeable if they are ordinarily resident in theUKor operate a business in theUK.

If you are neither resident, nor ordinarily resident in theUK, no capital gains tax is payable even if the asset disposed of is situated in theUK.

The planning is to delay the disposal of assets pregnant with a gain until you have left the UK and have become both not resident and not ordinarily resident. This planning needs good professional advice.

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Do not rely on the extra statutory concession relating to the year of departure from and return to the UK(Fulford Dobson, ex p, R vHMIT 60 TC 168). Make sure you are neither resident nor ordinarily resident for the whole of the tax year and do not need to rely onESC D2.

Some tax payers are under the mistaken impression that if they own a property abroad, e.g.Spain, no tax is payable. Wrong; if you are resident you will pay tax on the chargeable gain even though the property may not be situated in the UK. Residents are liable to tax on worldwide asset sales

Make sure you use the annual threshold.

The annual exemption for 2011/2012 is £10,600 (Section 3 TCGA1992).

The gain is then taxed at the flat rate of 18% but if you pay tax at 40% the charge is at 28%.

Maximise the Principal Private Residence exemption.

Simply explained if you sell your home that you are living in or have lived in then the gain is exempt from tax.

Special provisions apply if you own two residences (Section 222(5) TCGA 1992) and if you have had periods of time when you were not in occupation (Section 223(3) TCGA 1992).

 Please be reminded that irrespective of occupation the final 36 months of ownership qualify for relief (Section 223(1) TCGA 1992).

Entrepreneurs’ Relief

Entrepreneur’s Relief which has no age limit but is not as generous as Taper Relief asit is cut off at the lifetime limit of £10,000,000.

The first £10,000,000 gains charged at 10%. The balance is chargeable at 18% or 28% if you are a higher rate taxpayer.

Exploit Entrepreneurs’ Relief  

If you want to sell a personally owned building used in your current business but you do not want to either cease to trade or sell the business then the route is to genuinely start another business. Run that business from that building for at least one year.

Then you can cease to trade or sell the business and sell the building with full Entrepreneurs Relief.

Book in for a Property Investor Night to Find out More: www.positiverealestate.com.au Jason Whitton, Founder of Positive Real Estate discusses in this week’s market update that as a property investor you will have a different financial outcome both NOW and later on, depending on how you structure your investment; which is very important to consider and get RIGHT from the beginning. So what do we mean by that. There are 3 ways you can own a property and different taxation outcomes of each, which Jason runs through in detail in this week’s video:- 1. Own the property in your own name 2. Own the property in a company trust structure — or combination of a number of different trusts and/ or company structures 3. Own the property in a super fund Find out which is best for you – or maybe you can combine these structures!
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Tax revenue is a vital part of the United States government. The income generated from taxes allows the government to finance public works programs, build infrastructure and maintain a military. When the government needs to raise more revenue it generally raises the tax rate to create more income. The idea of raising taxes to raise revenue generally works; however, history has show that more revenue is not gained from the capital gains tax. When the capital gains tax rate rises there is less revenue generated, investment capital decreases, and the economy slows.

The capital gains tax is a tax charged to the profit realized from the sale of an asset that was purchased at a lower price. Capital gains are commonly realized from the sale of stocks, bonds and property. A capital gain is treated as an income and like any income, it is taxed. Under current United States tax code there are two different types of capital gains, short term and long-term gains. A short-term gain is considered to be the purchase and sale of an asset for a gain in less than one year. Long-term capital gain requires a year or more between the purchase of an asset and the sale of the asset for a gain. Short-term capital gains are taxed at the ordinary income tax level of the investor, however; long-term capital gains are taxed differently. Currently investors in the 10% to 15% income tax range pay no long term-capital gains tax and everyone else pays a 15% tax on capital gains. (Beach, Hederman & Guinevera, 2008)

Economic growth in America is important and relies on the input of two factors: input of capital and labor, and the productivity of the inputs. For the economy to grow capital and labor in the market must increase or a more efficient way to produce products is found, or both situations occur. The need to invest in capital is directly related to the growth of the economy by increasing the amount of capital available in the economy and by enhancing labor productivity.  Labor productivity can be directly complemented capital in the economy for investment in more productive operations. (The Economic Effects of Capital Gains Taxation, 1997)

When capital gain tax rates raise the return on an investment is lowered and the cost to acquire capital increases.  When the return on investment is lower there is less investment and the amount of available capital in the economy decreases. The inverse to an increase in the capital gains tax would be a decrease to the capital gains tax. A decrease in the capital gains tax rate is believed to stimulate investing and the amount of capital in the economy by producing more profitable and successful businesses, because they are able to acquire the funds required to under go new potential income projects.  The trickledown effect would produce higher wages, raising the standard of living and create jobs. (Throning, 1995)

A recent study was conducted by DRI/McGraw-Hill it was estimated that the reducing individuals long-term capital gains taxes by 50% and corporations capital gains tax by 25% the level of business spending would have been billion dollars higher than it was in 2007 creating the GDP of America to be roughly 0.4 percent higher. The conclusion of the study notes “the evidence suggests to almost all economists that a capital gains cut is good for the economy and roughly neutral for tax collections.”(Jorgenson, Dale, Yun & Kun-Young) The lower tax rate would only have positive effects on the economy such as higher standards of living, increased productivity and increased investment. A lower capital gains tax would increase individual wealth that could be re-invested or contributed to a personal savings account.

Over one hundred million Americans own stock, the majority of Americans that hold stock hold them in mutual funds. (Chait, 2008)  In 2007 mutual fund holders paid over billion dollars in long-term capital gains taxes.  Congressman Jim Saxton, the ranking member of the Joint Economic Committee states: “…Under current law, if shareholders do nothing more than buy and hold mutual fund shares, they will be hit with taxes on long-term capital gains realized by the fund, even if they are immediately reinvested in the fund.”(Mutual Fund Shareholders Slammed Again by Higher Taxes, 2008) As stated that is capital transferred directly to the federal government rather than directly re-invested in the economy.  One recent study by the National Bureau of Economic Research stated that the each dollar in federal tax increase has led to an additional .07 in federal spending. (Tax Increase Would Damage Economic Outlook, 2008) 

The federal government requires large amounts of funds to continue operation and generally overspends, the current solution it to raise taxes to help pay for large expenses. Despite normal intuition a decrease in the capital gains tax rate has yielded higher tax revenues. Using historical evidence as proof that a lower capital gains tax increases revenue, in 1978 when the capital gains tax was lowered, tax revenue began to increase. When the tax was reduced again in 1981 tax revenue increased again drastically until 1987 when the capital gains tax increased and revenue began to decline. In 1986 the tax revenue generated from the capital gains tax at the lowest point it has been in fifty years, was over three times of that in 1977. The lower tax rate and higher tax revenue suggests that more investors are placing capital gaining on capital investments. With larger amounts of capital investments businesses are able to easily acquire working capital and continue operations. As stated earlier, more capital invested in the economy will increase the stand of living, increase income and lower unemployment. (The Economic Effects of Capital Gains Taxation, 1997)

An increase in the standard of living will allow households to purchase more good and good of higher quality. A higher standard of living allow for more money to be spent and an even larger inflow of capital into the economy. An increase in household income will allow for a larger household savings and investing rate. If households invested the extra income, there would be a snowball effect of new capital pumped into the economy. The circuitous effect of increasing capital into the economy would also result in a decrease in unemployment. Historically when unemployment is low, interest rates are higher, allowing for an increase in investor capital gains and one more stream for more capital gains tax revenue. 

A reduction in the capital gains tax could counter the lock-in effect, which occurs when capital assets are not sold because the gains on capital are taxed at a high rate. When investors lock-in the tax base for the capital gains tax is lowered. Unlocking assets allows holders capital to sell holdings and achieve desired returns.  It is estimated that there are billions of dollars of equity that are currently locked into assets.  (The Economic Effects of Capital Gains Taxation, 1997)

            When a decrease in the capital gains tax yields higher tax revenue it is time to examine the position of the tax rate on the Laffer curve. It is reasonable to assume that when the tax is high it falls on the downward side of the curve. When the tax rate falls on downward side of the Laffer curve the government is limiting the revenue it can receive.  Investors are motivated to find ways to avoid paying the tax. To avoid paying capital gains tax investors could not enter into activities what will produce gains on capital such as stock ownership thus limiting the amount of capital in the economy available for companies to acquire. (Thorning, 1995)

            With a very tenuous relationship between revenue from the capital gains tax rate and the level of investment based on the level of the capital gains tax rate and the effect on the entire economy it is important to look towards the future. With current capital gains tax law set to expire and rise by 2011 and a presidential election just around the corner, it is critical to know each candidates position on capital gains tax. What each candidate plans to do with the capital gains tax could have a critical effect on the economy.

            On December 31, 2010, the tax rates on capital gains and dividends enacted in 2003 is set to expire. The current long-term capital gains tax rate of 15% will increase to 25%. With the tax higher a lock-in effect could occur where capital is not sold after January of 2011. Prior to the tax rate increase many investors will liquidate assets early to avoid paying the higher taxes.  Senator Barack Obama said that he would not renew the current capital gains tax rate and allow the tax to increase.  (Satow, 2008)  Senator John McCain has stated he want to keep capital gains taxes at current rats. With the current credit crunch and many businesses unable to rise capital from banks they must turn to investors. If investors are motivated not to invest capital back into the economy because of higher taxes, many businesses will fail. 

            In all sectors of the economy there is a need for capital funding. Many businesses require funds to continue operation that are in turn repaid to the investor along with an incentive for taking the risk of lending money. When the capital gains tax rates are raised the incentive for taking the risk of investing is diminished.  When there is a lack of investors the ability to raise capital for industries becomes limited and very expensive so new projects are not taken further limiting the amount of capital in the economy.  When the taxes of investing are reduced it has been proven that there is more money into the economy and the government receives more from tax revenue.

References

Beach, W., Hederman, R., & Nell, G. (2008, Oct. 15). Economic Effects of Increasing the Tax Rates on Capital Gains and Dividends. Heritage Foundation. Retrieved Oct. 6, 2008, from http://www.heritage.org/Research/taxes/wm1891.cfm.

Chait, J. (2008, September 24). Capital Offense: How the rich rolled Barack Obama. The New Republic, pp. 5.

Jorgenson, W Dale, Yun, and Kun-Young. “2. Taxation of Income from Capital.” Tax Reform and the Cost of Capital (0): 17-39.

Mutual Fund Shareholders Slammed Again by Higher Taxes: Damage would raise with Increasing Capital Gains Rate, a report of the members of the Joint Economic Committee, U.S. Congress, 110th Cong, 2nd sess. (C. Prt. 110-41). (2008)

Satow, J. (2008, July 15). Obama Capital Gains Tax Hike Would Hit N.Y. Hard. The New York Sun. Retrieved Oct. 6, 2008, from Http://www.nysun.com/business/obama-capital-gains-tax-hike-would-hit-new-your-hard.

Tax Increase Would Damage Economic Outlook, a report of the members of the Joint Economic Committee, U.S. Congress, 110th Cong, 2nd sess. (C. Prt. 110-40). (2008)

The Economic Effects of Capital Gains Taxation, a report of the members of the Joint Economic Committee, U.S. Congress, 105th Cong., 1st sess. (JEC). (1997)

Thorning, M. (1995). Trends in Investment and Tax Policy: Time For a Change?. Business Economics, 30, 23.

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Taxes – A Guide To Taxes

The following articles are a compiled report about the different elements of the US tax system, and the many facets of deductions, credits, qualifying dependents, the corporate entities, the sole proprietorships, and
the everyday average citizen. There are many interesting facts and figures that are available to every American, absolutely free, through the IRS website, the problem however, is that much of the information that is
available is in a language that seems foreign to readers look

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Taxpayers are usually terrified of the word “capital gains.” You can define capital gains as the profits you gain from the sale of an asset. As per capital gains tax law, you have to pay taxes on the profits you make when you sell an asset. You can make a capital gain on assets such as land, stocks, or bonds. On the other hand, if you made a loss on a piece of property, it is considered to be a capital loss for which you get a tax deduction.

A clause in the capital gains tax law permits you to avoid paying capital gains tax even if you make a huge profit while selling an asset. Real estate in one area in which you can dodge capital gains tax. Real estate is known to be a very profitable venture; its price never goes down as long as you own it. The good news is that IRS has enabled tax payers, who invest in real estate, to avoid paying taxes on the profits they make on it.

As per capital gains tax law, if you are single and make a profit of less than 0,000 or if you are married and make a profit of less than 0,000 on the sale of your primary residence, you don’t have to pay any capital gains tax. So, unless you make a really big profit while selling your residence, capital gains tax is not something you have to worry about. Even if you make a profit exceeding 0,000 or 0,000, you have to pay taxes only on the amount which exceeds that.

If you would like to sell a house that you have been renting, you will be interested to know that you can consider it to be your primary residence, provided you live in it at least two years during a span of five years before you sell it. Several people who invest in real estate use this convenient clause to escape capital gains tax. All they have to do is to live in the property they have been renting for two years just before selling it.

Capital gains tax law has yet another clause that can help you avoid paying taxes on profits made on a place you have been renting even if you don’t live in it for two years. You simply have to invest your profits in more real estate property, and you can escape paying capital gains taxes.

You have to pay taxes on profits made out of selling bonds. If you have held the stock for five or more years, you have to pay a 15 percent capital gains tax . However, if you have held it for less than five years, you have to pay almost double, that is 30 percent.

Your tax professional is the best person to answer any queries you might have on capital gains tax law.

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A Second Home

The Rue du Tourniquet-Saint-Jean, formerly one of the darkest and most tortuous of the streets about the Hotel de Ville, zigzagged round the little gardens of the Paris Prefecture, and ended at the Rue Martroi, exactly at the angle of an old wall now pulled down. Here stood the turnstile to which the street owed its name; it was not removed till 1823, when the Municipality built a ballroom on the garden plot adjoining the Hotel de Ville, for the fete given in honor of the Duc d’Angouleme on his

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More Capital Gains Tax Property Products

I am sure you are aware of the U.S. tax regulation that allows homeowners to exclude a certain amount of capital gain from their income tax.

It works like this: If you sell a home that has been your primary residence for two out of the last five years you can exclude up to 0,000 in capital gains from income tax. The original intent was to prevent large capital gains tax liabilities from locking older homeowners into their homes.

That exclusion has been a wonderful break for clever real estate investors. You could buy a home that needed rehabbing. Move into the home and start doing the necessary repairs. After 18 to 20 months you could offer the home for sale with the stipulation that the deal could not close until after you passed the two year residency mark.

The idea here was that the home would be worth a great deal more after fix-up, yet you could avoid paying capital gains tax on your profit because you had lived in the property for the required two years. This is a terrific way for new real estate investors to get started. With the tax free profits from a couple of these deals you would have the cash need to make down payments on two or three properties and you would be off and flying.

No Tenants, Please

Some investors using this tactic rented the property before or after they used it as a primary residence. They may have bought a property that was already being used as a rental and it suited their needs to leave the tenant in place for a year or three, before they moved in. Until Jan. 1, 2009 they could still claim the tax exclusion if the home was used as their primary residence for two out of the five years they owned the property.

When it finally dawned on the politicians that the rule was curtailing the amount of tax income that they could frivolously spend, they, of course, changed the rules. Under the “The Housing Assistance Tax Act of 2008″ the amount of profits that can be excluded from your income tax becomes more complicated. Your gain will now be taxed based on the percentage of time you used the home as your primary residence.

Under the new act, any capital gain must be divided between qualifying and non-qualifying use. That means your non-qualifying use of the property will cut the amount of capital gain that can be excluded from your income tax.

It Now Works Like This

You avoid up to 0,000 in capital gains (0,000 if married and filing jointly) when selling your home. To earn that exclusion you must own and live in the property as your primary residence for at least two years out of the five years ending on the date of sale.

Here’s where you must be careful. If the property isn’t used as a primary residence during the entire five-year period you will have to pay more capital gains tax. If you use the house as a rental, or a vacation home or as a second home; any of those would be non-qualifying use and would reduce the amount of your capital gains tax exclusion.

Just remember that “Qualifying Use” means the property must be used as a primary residence. Non-qualifying use means the property is not being used as a primary residence by either the homeowner or the homeowner’s spouse. If you use the home as your primary residence you will not need to allocate your gain.

Calculating Gain

In most cases calculating your gain will be simple. The gain from the sale just needs to be allocated between what gain is excluded and what gain is not excluded. The portion of capital gain that cannot be excluded is determined by dividing the period of non-qualifying use by the period of ownership:

Period of non-qualifying use
————————————–
Period of ownership

Until the new act, tax advisors suggested homeowners sell their home after living their for at least two years out of the five years ending on the date of sale. This allowed the owners to qualify for the capital gains exclusion, because the exclusion was based on the last five years of ownership.

Under the new regulations the exclusion is based on the period of time when the property is used as a primary residence. Any other use could mean you must pay more in capital gains tax.

Taxpayers owning second homes, vacation homes, and rental properties will need to revise their capital gains strategy accordingly. The use test is applied for the time period beginning January 1, 2009, until the property is sold. To get the most tax benefit, the property will need to be used entirely as a primary residence during this time period.

If you would like to review the many ways government can confuse a free market with an incomprehensible tax code, you will find a summary of the tax provisions in H.R. 3221 from the Ways and Means Committee here:

http://taxes.about.com/gi/dynamic/offsite.htm?zi=1/XJ&sdn=taxes&cdn=money&tm=30&gps=514_1681_1020_567&f=10&tt=13&bt=0&bts=0&zu=http%3A//waysandmeans.house.gov/media/pdf/110/eresummary.pdf

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