Do you know how many taxes there can be on an investment real estate sale? Depending on the asset type there are as many as five different taxes. Capital gains sales are no longer just 15 percent and investors are seeking ways to avoid taxes on investment real estate sales.
The typical transaction includes multiple taxes and rates such as:
- Income Tax (if held short term)
- Capital gains (15-20%)
- Recapture tax (25%)
- Obamacare tax (3.8%)
- State tax (3-9%)
What Is a 1031 Exchange?
A 1031 exchange allows investors to sell investment real estate and trade up (exchange) to a new investment or business use piece of property to avoid all taxes. Doing so is advantageous in many ways.
A good 1031 exchange candidate:
1. Owns property that has been held long term (with or without appreciation)
2. Has property that has been depreciated (avoid depreciation recapture 25%)
3. Owns property that has been rented and will be subject to capital gains and state taxes.
Reasons to exchange:
- Looking to diversify/more cash flow
- Looking to buy a larger/more profitable property or unit
- Looking to downsize
1031 exchanges can be extremely flexible for the investor. There are several different kinds of exchange transactions you can make depending on your situation and goal. With a little planning and proper help, you can avoid capital gains taxes on investment real estate sales and preserve more capital to reinvest. Interested? Midland IRAs & 1031s can help you plan the transaction and start saving today.
What Is a Self-Directed IRA?
A self-directed IRA lets you buy alternative assets for your IRA such as real estate, precious metals, private equity and stock, farmland, and much, much more. These plans are fully controlled by the plan owners (you!), allowing you to choose assets that you think will be successful. All income returns to the IRA on a tax-sheltered basis including rent, sale proceeds, and gains–which can be a great way to build retirement income.
Do you feel confident owning tangible investment real estate? Perhaps you’re familiar with renting single or multi-family homes. Or, maybe you have a knack identifying unimproved property that has potential for development. These are just a few examples of real estate-related assets allowed in self-directed plans. All returns on investments in your IRA are tax-sheltered. So, if you’re looking to diversify your retirement portfolio, a self-directed IRA may be perfect for you.
What you can do inside your IRA:
- Own investment real estate including houses, condos, land and commercial property
- Lend money via a note from your IRA
- Invest in private LLCs and private stocks
What you cannot do in a self-directed IRA:
- There is no personal use of property or assets owned by your IRA
- Cannot rent, sell to or buy real estate from lineal ascendants or descendants.
- You cannot remodel or do construction on property yourself
- Purchase life insurance or collectibles
If you would like to learn more about a self-directed IRAs or 1031 exchanges to avoid taxes on investment real estate sales call us today at 239-333-1032 or visit www.midlandira.com.
Dave Owens CPA, CES is the President and CEO of Midland IRA and 1031.