Real Estate Investing Tax Considerations

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Among the most complicated tax laws are those surrounding Real Estate investing tax. The following information should NOT be considered legal advice — before making any decisions you should consult your tax accountant or attorney.

Because there are varying laws governing real estate investing tax between countries, and even between the U.S. states, any general advice offered would be useless. There are, however, a few particulars that can be applied in many areas.

A lot of investors believe they can buy a residential home, without taking up residence, make some repairs and then sell the property for a substantial profit. Although this is often true, the amount of profit can be decreased significantly by over looking current tax laws. The rule that is mis-remembered the most is the rule applied to property used as a personal residence. In the United States this is no longer law.

This rule was replaced in 1997 by one that only allows for the tax-free sale of a personal property after it has been occupied for two or more years. Investment income, whether from real estate or the sale of stock is considered capital gain. If an asset is held for a year or less it is considered a short-term gain. Taxes for short-term gains can be as high as 35 percent. Assets held for more than a year and then sold are now considered long term capital gains. These are usually taxed at 15 percent. One day (more or less) can make a 20 percent difference.

If you decide to keep the property as a residence for 730 days, you can avoid paying any Real Estate investing tax at all — providing you reinvest the money in a property that is equal or greater in value. (There is a one time exemption.)

There is an alternative, in the U.S. for investors who do not wish to occupy the property — the 1031 exchange.

If you trade a business property or investment for one considered of "like kind", you will be able to defer any tax owed. The term "like kind" is defined rather loosely. You can trade developed land for undeveloped land, commercial property for a residential rental property, etc. The one restriction is that the exchanged property must be an income producing asset, not a personal asset.

You are allowed 45 days to identify as many as three replacement properties. You must then close within 180 days. You will also need to find an "accommodator or facilitator" (a neutral intermediary) — to keep records and hold funds.

It is important to keep in mind that this option is considered tax deferral and not tax avoidance and cannot be used in conjunction with your personal residence. Be sure to consult with your attorney or tax accountant before you take advantage of this.

Married couples are allowed a profit of up to $500,000 on the sale of their personal residence, singles can make a profit of $250,000 without a tax penalty.

Mortgage interest deductions are still one of the best Real Estate investing tax write offs available, with up to $1 million loans qualifying, along with any points or loan origination fees.

Before making any investment decisions be certain to consult with professionals and keep up to date and accurate records. For those who are lucky enough to have inherited property, or are involved in estate sales and trusts, this is especially true. The fees involved will be more than paid for by avoiding unexpected taxes and penalties.




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