When to Pay the Piper (and how much will he charge)?

By Jon Christianson, Esq., JD, LLM Tax

Tax rates on capital gains are scheduled to increase in 2013 if Congress fails to extend the current rates. Should I pay my tax now or take a wait and see approach with a 1031 exchange?

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1031 Basics: Capital Gain Tax Calculator

1031 Exchange Basics

It is always prudent to consult with your tax and/or legal advisors about the tax consequences of selling before closing on the sale of a relinquished property, as a 1031 exchange generally cannot be set up after closing has occurred. Prior to seeking the input of your tax advisors and your specific situation, you can use Asset Preservation’s Capital Gain Calculator to obtain an approximate estimate of your capital gain tax liability. Enter your figures in the fields provided and click on the “Calculate” button in each area to determine your capital gain. Calculate Your Capital Gain Taxes Now…

New IRS Regulations Clarify "Repair" vs. "Capitalization"

This past Spring the IRS released Bulletin 2012-14 (T.D. 9654), Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property. The intent of the IRS was to clarify the current rules for capitalization. The new regulations define an improvement as a betterment, adaptation or restoration to a unit of property. The new regulations also list eight building systems that should be evaluated as their “own unit of property” and tax advisors preparing returns for investment property owners should review these new regulations thoroughly.

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Correctly Reporting Rental Real Estate

Real estate investors should correctly report rental real estate activity. Investors who are not real estate professionals generally must follow the passive activity loss limitations even if they materially participate in their rental real estate activities. Real estate professionals report rental real estate activities in which they materially participated as non-passive. However, real estate professionals who do not materially participate in rental activities are generally subject to passive activity loss limitations. Publication 925, Passive Activity and At-Risk Rules, includes more information on who qualifies as a real estate professional and the passive activity limits.

For more information, see the Passive Activity Loss Audit Technique Guide.

Recent Case Affirms Liability Because TICs
Not Sold in Conformity with Security Laws

In Redding vs. Montana First Judicial District Court, 2012 WL 2628053 (Supreme Court of Montana, 2012), the Court ruled on an aspect of the bankruptcy of DBSI, the largest company in the tenant-in-common (TIC) industry to go bankrupt. There had been significant debate in the past about whether or not TIC investments should be treated as securities (and promoted in adherence to all applicable securities laws) or treated as real estate investments. In this case involving a 1031 exchange into a replacement property that was a TIC promoted by DBSI, the Court determined that every applicable test of what comprises a security was met by the DBSI TIC property. In the end, the Court concluded that both the accounting firm and brokerage firm that recommended DBSI could be liable for losses the exchanger experienced due to the fact the TIC investment had not been promoted or sold in accordance with security laws.

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