UNDERSTANDING CAPITAL GAINS TAX

February 19, 2007 on 9:04 pm | In FASCINATING INDUSTRIAL REAL ESTATE INFORMATION, FASCINATING INFORMATION, FUNNY...MONEY, Investment Opportunities, New Developments, Uncategorized | 4 Comments

UNDERSTANDING CAPITAL GAINS TAX
 
Ever notice how doing your taxes gives you a headache? The IRS has complex taxing system. Currently, the tax rate on short-term Capital Gains - assets held for one year or less - are taxed at your normal income tax rate - 10% to 35%. When you sell a taxable item – such as real estate or stocks - that you have owned more than a year, you pay a sliding scale of fees that can range from 0% - 28% depending upon the nature of the capital gain. The taxes you pay on any given sale depend on your income-tax bracket, the type of asset you sold, and how long you held it, and when you sold it. Smartmoney.com’s Bill Bischoff, offers highlights on the breakdown on who pays what with long-term capital gains.
 
Homes and Small-Business Stock
The 0% Rate
Eligibility: Homeowners who owned and used their home as a main residence for at least two years before selling; some shareholders of small-business stock.
 
If you sell a home you’ve owned and used as your main residence for at least two years out of the five-year period, you are allowed to exclude up to $250,000 of gain tax free. If you are married, you can potentially exclude up to $500,000.
 
If your gain exceeds the amount you can exclude, the difference is treated as a long-term capital gain eligible for the 15% maximum rate (or 5% or 10% if you’re taxable income is low enough).
 
Investment Securities

The 5% Rate

Eligibility: Individuals in the 10% and 15% federal income tax brackets with net long-term capital gains from selling investment securities held for more than one year.
 
Individuals in the 10% and 15% bracket in 2006 earned a taxable income of up to $29,700 for singles, $59,400 for joint filers, $39,800 for heads of households, and $29,700 for married individuals who file separately.
 
Here’s how this rule works. Let’s say you’re filing jointly and had $55,000 of “regular” taxable income in 2006 and a net long-term gain of $10,000 from stock sales. The first $4,400 of gain from the stock sale will be taxed at 5%. The remaining $5,600 ($10,000-$5,600) will get taxed at the standard 15% rate. If the net long-term gain is $4,400 or less, the tax rate is 5% on the entire gain.

 

The 15% Rate

Eligibility: Individuals in the 25% federal income tax bracket or higher with net long-term capital gains from selling investment securities held for more than one year.
 

The 25% Rate

Eligibility: Property owners and real estate investment trust (REIT) investors in the 25% income-tax bracket or higher who hold property for more than one year.
 
Investment real-estate gains are taxed in two ways. If you claim depreciation deductions, at least some of those gains are taxed at a maximum rate of 25%.
 
For example, say you own a rental property and have deducted $32,000 of depreciation over the years. That depreciation reduces your basis in the property and results in a bigger taxable gain (or smaller loss) when you sell. Say you sold in 2006 for a $100,000 gain. The first $32,000 (called an unrecaptured Section 1250 gain) is taxed at a maximum rate of 25%. The remaining $68,000 of gain is taxed at the standard capital gains rate of 15%.
 
If you own shares in a REIT, when the REIT sells a piece of depreciable property and distributes the profit to its shareholders, you are taxed at the 25% maximum rate.
 
Collectibles and Small-Business Stock
The 28% Rate
Eligibility: Any collector in the 28% tax bracket or higher; some small business stock shareholders.
 
Net long-term gains from collectibles (stamps, coins, baseball cards and the like) are subject to a 28% maximum rate. This rate also applies to the taxable part of a gain from selling certain small-business stock that qualifies for a special 50% gain exclusion rule. Basically, these are shares in relatively small corporations that were originally issued to you and that you’ve owned more than five years.
 
For more information on capital gains, try www.smartmoney.com.
For making capital gains and other tax scenarios work for you, please consult your accountant.
 
Jodi Summers negotiates investment properties for Sotheby’s International Realty. For your real estate needs, e-mail Jodi Summers at jodis@verizon.net, or call 310.260.8269. Visit her websites at http://www.SoCalInvestmentRealEstate.com or http://www.santamonicalandmarks.com.
 
 
 
 
 

NONRESIDENTIAL CONSTRUCTION A MIXED BAG IN 2006

February 16, 2007 on 10:36 pm | In FASCINATING INDUSTRIAL REAL ESTATE INFORMATION, FASCINATING INFORMATION, FUNNY...MONEY, Investment Opportunities, LIGHTS…CAMERA…TRANSACTION, New Developments, OFFICE FODDER, PROPERTY MAINTENANCE, PROPERTY WISH LIST, Uncategorized | 2 Comments

NONRESIDENTIAL CONSTRUCTION A MIXED BAG IN 2006

The preliminary 2006 data from the Construction Industry Research Board paints a mixed picture for nonresidential construction around Southern California. In Los Angeles County, permit values for industrial structures fell by 37.1% from the 2005 total, while retail was down by 12.7%. Office permits made a last minute surge to wind up 3.1% over the 2005 permit total. Orange County was up across the board, with industrial ahead by 232.6%, office up by 84.7% and retail up by 32.6%.
The final numbers for Riverside County were also all positive, with industrial up by 139.6%, office ahead by 31.3% while retail was up by 7.3%. In San Bernardino County for 2006, industrial permits values were up by 15.9%, office was ahead by 36.1% and retail was up by 26.7%.
San Diego County’s 2006 nonresidential performance was uneven, with retail up by 16.0%, while industrial declined by 9.9% and office dropped by 28.0%. It was a similar story in Ventura County, with office permit values up by a stout 126.6%, while industrial values declined by 5.0% and retail was off by 25.1%.
In the 9-county Bay Area, industrial permit values declined by 11.9% in 2006, despite surges in San Mateo and Santa Clara counties. Office permit values jumped by 165.6%, with the pace set by San Francisco, San Mateo and Santa Clara counties. However, retail permit values dropped by 7.9% from 2005.
A final note: 2006 turned out to be a decent year for hotel building in Southern California, with permit values in Los Angeles County up by 27.9% over 2005, while Orange County was ahead by 419.6%, Riverside was up by 287.5% and San Diego County rose by 186.5%.

(Jack Kyser)

THE MANY WAYS TO DIVERT PAYING TAXES ON THE SALE OF A PROPERTY

February 11, 2007 on 10:36 pm | In FASCINATING INFORMATION, FUNNY...MONEY, Investment Opportunities, OFFICE BUILDINGS, PROPERTY MAINTENANCE, PROPERTY WISH LIST, Uncategorized | 4 Comments

 THE MANY WAYS TO DIVERT PAYING TAXES ON THE SALE OF A PROPERTY

Alex owns a couple of income properties in trendy Venice. He bought them way back in undesirable days for $75,000 apiece. Each property is now worth $950,000 or more. Alex is 61 years old. He thinks about selling off some of his holdings and traveling. But he has questions – Alex needs to know what his tax obligations are once he sells a property?
 
Should Alex decide to pay capital gains tax, and pocket the rest of the gain, the terms have become more desirable. For property sales transactions which conclude between May 6, 2003 and December 31, 2008, the capital gains tax rate has been reduced from 20 percent to 15 percent. For taxpayers in the lower brackets of 10 or 15 percent, the tax will only be five percent of the gain.
 
As for what to do with your money, you have a number of options. Before taking any action, be sure to consult your financial advisor. Benny Kass, senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in real estate observed that property options can include:
 
1.     Sell and pay the tax: Assume Alex has depreciated the property by $30,000 over the years. His basis in the property will be $45,000 ($75,000 - $30,000). If he were to sell the property for $1,000,000, he will have made a profit of $955,000 ($1,000,000 - $45,000). This does not take into account other costs and expenses which may reduce his gain - fix-up costs, closing fees, and real estate commissions. For Federal tax purposes, Alex will owe Uncle Sam $143,250 (at the 15 percent rate), not including state taxes and other prizes. Any remaining mortgage fees will have to be paid off at settlement.
 
2.     Do a Like Kind exchange: under section 1031 of the Internal Revenue Code, Alex can exchange his property for another piece of property that will be equal to or more expensive than his current property, deferring his capital gains tax obligation along the way.
 
“If you want to learn how to build your real estate investment wealth without owing capital gains tax as you do so, the secret is tax-deferred exchanges, as authorized by Internal Revenue Code 1031,” confirms noted real estate columnist Bob Bruss. “The simple tax rule for avoiding capital gain tax when disposing of a rental or investment property is that the investor must trade ‘equal or up’ in both price and equity for one or more qualifying “like-kind” properties…”
 
There are specific rules applicable to 1031 exchanges. Net sales proceeds must be held by a neutral intermediary. Replacement properties must be identified within 45 days after the sale of the relinquished property, and the sale must close within 180 days.
 
3.                 Installment Sale: Alex can defer - but not avoid - paying capital gains tax if he sells the property and carries back a mortgage. This is known as an “installment sale”. Under this arrangement, you pay a portion of the capital gains tax as the moneys come in each year.
 
4.       Donate the property to a charity – FYI, there are restrictions and limitations on such donations which Alex should fully understand before you decide to go this route.
 
5.       If the property is worth keeping in the family, Alex can sell it to a family member, and carry back the financing. Let’s say Alex sells the property for $1,000,000 to his children, and agrees to carry back the entire purchase price. His lucky kids sign a promissory note in the amount of $1,000,000 - there will be a deed of trust (mortgage) on the property in this amount. If Alex is married, he and his wife can each gift back $11,000 to each child per year, tax free – that’s $44,000 of the balance of the note each year. Thus, in the first year, the note balance will be reduced down to $956,000 ($1,000,000 - $44,000), and so on each year for the next 22.7 years.
 
There are a number of ways in which you can sell your rental properties. Speak with your financial advisors before making any final decisions.
 
Jodi Summers negotiates investment properties for Sotheby’s International Realty. For your real estate needs, e-mail Jodi Summers at jodis@verizon.net, or call 310.260.8269. Visit her websites at http://www.SoCalInvestmentRealEstate.com or http://www.santamonicalandmarks.com.

THE TAX BENEFITS OF OWNING INVESTMENT PROPERTIES

February 7, 2007 on 11:54 pm | In FASCINATING INDUSTRIAL REAL ESTATE INFORMATION, FASCINATING INFORMATION, FUNNY...MONEY, Investment Opportunities, LIGHTS…CAMERA…TRANSACTION, PROPERTY WISH LIST, Uncategorized | 1 Comment

THE TAX BENEFITS OF OWNING INVESTMENT PROPERTIES

 
Last year, the SoCal six-country region — San Diego, Los Angeles, Orange, Riverside, San Bernardino and Ventura — relaxed after the impressive real estate escalation that ran between 2000 and 2005 - when property values in many communities doubled and then some.
 
Many people speculated on investment properties during this accelerated market, and they are now entitled to a slew of pleasing tax breaks. Here’s an overview of real estate tax benefits for investors
 
LOSS DEDUCTION
A real estate investor who owns at least 10% of a property and “materially participates” in managing their properties is able to deduct up to $25,000 annually in realty investment property loss deduction against their ordinary taxable income. Actions as simple as setting tenant selection criteria and repair policies allow you to “materially participate” in your property. 
 
This maximum deductible of $25,000 annually applies only if an investor’s annual adjusted gross income does not exceed $100,000. Above the six-figure adjusted income level, the allowable tax loss deduction phases out as dictated by the government, flat lining at $150,000. Comfortably, IRS Notice 88-94 allows those in that tax stratosphere to suspend their undeducted real estate investment tax loss until the property is sold. The suspended tax loss is then subtracted from the capital gain to lower the taxable profit at the time of sale.
 
A real estate professional (who spends at least 750 hours per year, or more than 50 percent of their business time in qualified real estate work) has deductions galore. According to real estate expert Bob Bruss, “There is no limit to the allowable tax deductions from your properties that can be subtracted from your other ordinary income.”
 
DEPRECIATION
The government has gifted property investors the opportunity to depreciate their investment properties. Depreciation is a “paper loss” for estimated wear, tear and obsolescence. Land value is not depreciable.
 
Residential income property is depreciated over 27.5 years on a straight-line basis (equal annual reductions in the book value of a property). Commercial property is depreciated over 39 years. Personal property used in operating the property, such as apartment appliances, is usually depreciated over five to 10 years. The vehicles used in the investment operation can be depreciated over their useful lives. There is also the new first-year, 100 percent deduction for up to $100,000 of business equipment.
 
Depreciation is a non-cash expense deduction, which reduces taxable income from the investment property. According to Bruss, depreciation expense deductions can turn a positive cash flow property into a tax loss for income tax purposes, thus creating a “tax shelter” for that income property’s tax flow. While most investment properties appreciate in market value each year, on paper their “book value” depreciates as the property ages.
 
RECAPTURED DEPRECIATION GETS TAXED WITH THE SALE
 
The 1997 Taxpayer Relief Act reduced the federal capital gains tax rate to 20 percent. In 2003, the government again reduced the capital gains tax rate to 15 percent for assets owned more than 12 months. FYI - the special 25 percent depreciation “recapture” tax rate remains unchanged. Those depreciation deductions you’ve taken are taxed when a property is sold.
 
As Bruss points out: If you bought an investment property for $300,000 and deducted $100,000 of depreciation during your ownership years, the book value (aqua “adjusted cost basis”) declined to $200,000. Then you sold for $450,000. Your capital gain is therefore $250,000 ($450,000 minus $200,000). Of that $250,000 capital gain, the $100,000 depreciation deducted is  “recaptured” and taxed at the 25 percent special federal tax rate. The $150,000 remainder of your capital gain will be taxed at the new 15 percent maximum tax rate.
 
“In tax circles, this little adjustment is known as depreciation “recapture,” and essentially it’s the government’s way of making sure you don’t take advantage of depreciation deductions twice,” observes CNN/Money Columnist Walter Updegrave.
 
Many investors will avoid paying the 25 percent federal recapture tax rate for deducted depreciation by exchanging the property for another investment property, better known as a 1031 exchange.
 
The financially savvy truly enjoy investment properties because they appreciate in market value, and also produce significant tax savings - both during ownership and at the time of resale or tax-deferred exchange. Talk to your accountant about which tax deductions may be right for you.
 
Jodi Summers negotiates investment properties for Sotheby’s International Realty. For your real estate needs, e-mail Jodi Summers at jodis@verizon.net, or call 310.260.8269. Visit her websites at http//www.SoCalInvestmentRealEstate.com or http://www.santamonicalandmarks.com.

THE TAX BENEFITS OF OWNING INVESTMENT PROPERTIES

February 4, 2007 on 11:25 am | In FASCINATING INDUSTRIAL REAL ESTATE INFORMATION, FASCINATING INFORMATION, FUNNY...MONEY, Investment Opportunities, New Developments, PROPERTY WISH LIST, Uncategorized | 3 Comments

THE TAX BENEFITS OF OWNING INVESTMENT PROPERTIES
 

Last year, the SoCal six-country region — San Diego, Los Angeles, Orange, Riverside, San Bernardino and Ventura — relaxed after the impressive real estate escalation that ran between 2000 and 2005 - when property values in many communities doubled and then some.
 

Many people speculated on investment properties during this accelerated market, and they are now entitled to a slew of pleasing tax breaks. Here’s an overview of real estate tax benefits for investors
 

LOSS DEDUCTION
A real estate investor who owns at least 10% of a property and “materially participates” in managing their properties is able to deduct up to $25,000 annually in realty investment property loss deduction against their ordinary taxable income. Actions as simple as setting tenant selection criteria and repair policies allow you to “materially participate” in your property. 
 

This maximum deductible of $25,000 annually applies only if an investor’s annual adjusted gross income does not exceed $100,000. Above the six-figure adjusted income level, the allowable tax loss deduction phases out as dictated by the government, flat lining at $150,000. Comfortably, IRS Notice 88-94 allows those in that tax stratosphere to suspend their undeducted real estate investment tax loss until the property is sold. The suspended tax loss is then subtracted from the capital gain to lower the taxable profit at the time of sale.
 

A real estate professional (who spends at least 750 hours per year, or more than 50 percent of their business time in qualified real estate work) has deductions galore. According to real estate expert Bob Bruss, “There is no limit to the allowable tax deductions from your properties that can be subtracted from your other ordinary income.”
 

DEPRECIATION
The government has gifted property investors the opportunity to depreciate their investment properties. Depreciation is a “paper loss” for estimated wear, tear and obsolescence. Land value is not depreciable.
 

Residential income property is depreciated over 27.5 years on a straight-line basis (equal annual reductions in the book value of a property). Commercial property is depreciated over 39 years. Personal property used in operating the property, such as apartment appliances, is usually depreciated over five to 10 years. The vehicles used in the investment operation can be depreciated over their useful lives. There is also the new first-year, 100 percent deduction for up to $100,000 of business equipment.
 

Depreciation is a non-cash expense deduction, which reduces taxable income from the investment property. According to Bruss, depreciation expense deductions can turn a positive cash flow property into a tax loss for income tax purposes, thus creating a “tax shelter” for that income property’s tax flow. While most investment properties appreciate in market value each year, on paper their “book value” depreciates as the property ages.
 

RECAPTURED DEPRECIATION GETS TAXED WITH THE SALE
 

The 1997 Taxpayer Relief Act reduced the federal capital gains tax rate to 20 percent. In 2003, the government again reduced the capital gains tax rate to 15 percent for assets owned more than 12 months. FYI - the special 25 percent depreciation “recapture” tax rate remains unchanged. Those depreciation deductions you’ve taken are taxed when a property is sold.
 

As Bruss points out: If you bought an investment property for $300,000 and deducted $100,000 of depreciation during your ownership years, the book value (aqua “adjusted cost basis”) declined to $200,000. Then you sold for $450,000. Your capital gain is therefore $250,000 ($450,000 minus $200,000). Of that $250,000 capital gain, the $100,000 depreciation deducted is  “recaptured” and taxed at the 25 percent special federal tax rate. The $150,000 remainder of your capital gain will be taxed at the new 15 percent maximum tax rate.
 

“In tax circles, this little adjustment is known as depreciation “recapture,” and essentially it’s the government’s way of making sure you don’t take advantage of depreciation deductions twice,” observes CNN/Money Columnist Walter Updegrave.
 
Many investors will avoid paying the 25 percent federal recapture tax rate for deducted depreciation by exchanging the property for another investment property, better known as a 1031 exchange.
 

The financially savvy truly enjoy investment properties because they appreciate in market value, and also produce significant tax savings - both during ownership and at the time of resale or tax-deferred exchange. Talk to your accountant about which tax deductions may be right for you.
 

Jodi Summers negotiates investment properties for Sotheby’s International Realty. For your real estate needs, e-mail Jodi Summers at jodis@verizon.net, or call 310.260.8269. Visit her websites at
http://www.SoCalInvestmentRealEstate.com  or http://www.SantaMonicaLandmarks.com.