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Utah Real Estate - Real Estate Tax tips

Real Estate Agent with Linda Secrist and Associates (Prudential)

Real Estate Tax Tips

 Looking for ways to benefit as a Real Estate Investor?  Well, tax season is here and we have provided some tax tips for Real Estate Investors that will help you get the most out of your real estate holdings.

Establish an investment property as your primary residence.

If you turn your investment property into a primary residence. you can avoid capital gains tax altogether. To make this work, you must spend 2 years (or 730 days) living in the home in the last five years. The time doesn't have to be sequential. You just need to establish residency,  then you're eligible to sell the home and can make up to $250,000 in capital gains ($500,000 if married filing jointly) without paying any taxes.

Hold on to properties for more than a year.

TV shows glamorize quick house flipping techniques as they flip a house in a matter of weeks, however when this happens so quickly a large portion of the profit will go straight to the IRS unless you hold a property for a year or more.

Captial gain is considered to be any investment profit and is tax based on the amount of time you've owned the property and on your income. 

You'll be charged the income tax rate of 35 percent or more if you hold an asset for less than a year. If you keep a property for more than a year, you'll qualify for long-term capital gains taxes, which normally top out at 15 percent.

Be prepared for business taxes.

Don't be surprised if the IRS consider your several real estate transactions per year as business or trade rather than an investment strategy. While the circumstances may vary from case to case, if you're earning more than half of your income from real estate, your earnings will change from 'capital gains' to a means of producing income that's subject to ordinary tax rates. Plus, there's an additional 15.3 percent in self-employment taxes.

Do a like-kind exchange.

 A like-kind exchange is a good option if you are wanting to avoid capital gains taxes, but you want to get a new property.  The provision (also known as section 1031 exchange)  allows you to 'exchange' one property for another of similar value and defer the tax bill.

Both the property you give up and the one you receive must be used for investment purposes, trade or business in order to qualify. The exchange of any real estate for another piece of real estate, regardless of either's quality is like-kind.  It also must be 'like-kind,' or an exchange of two. While you can exchange a parcel of land in the city for a dairy farm in the country, you couldn't exchange that same city parcel for say, a flat-bed truck.

You can also do a tax-free exchange of a rental property that has been used for personal purposes for a similar piece of property, (this came into effect back in March of 2008.)  You must have owned the property for 24 months before  the exchange, and must have rented the home for 14 days or more in order to qualify. You also cannot have used the property for more than 14 days or 10 percent of the time it was rented in the past two years, whichever is greater. 

Remember if and when you decide to sell the property you exchange for, you'll likely owe taxes.  Like-kind exhanges will only defer your tax bill.






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