Easier Than 1031 Exchange
Wouldn't it be easier to just pay uncle sam the 15% and write it off. You are eventually going to have to pay him might as well get it out of the way right?
If I am way off base someone correct me I'm still a young buck. Taxes just don't bother me much. 
Jim
Why not delay the taxes and use tomorrows $ which will be worth less than todays $.Keep what is rightfully yours as long as you can.
All other variables the same, would you rather have 20% appreciation on 230k property or a 200k property?
Sure you have to pay it back one day, but Uncle Sam is lending you interest free money to fund your real estate deals.
Brenda
You use a 1031 for about the same reason you put money in an IRA. Use the money now and pay the taxes later.
Actually I think IRA is different example than a 1031. All IRA money is pretaxed and is taxed when you withdraw it at your current tax schedule. So the theory behind the IRA is that you can put more money in, because it is pretax, and you will be at a lower tax bracket when it is withdrawn.
I thought that each time you did a 1031 the tax that should have been paid on that transaction is recorded and that exact tax amount must be paid back.
Does anyone know how 1031 taxes are recorded and eventually paid back? If you die with a property that you bought as part of a 1031, does it become part of your estate and taxed as such? As Vena Jones-Cox once said, can you give uncle sam the finger from the grave?
Brenda
Brenda.
A 1031 alows you basically transfere the equity into another property so that your realized income stays the same. You dont pay any tax on the gain because it is not realized income.
The only way you really get to uncle S the fingire is if you give your estate to charity
_________________
B.G. & Wheeler D. LLc Inc. and Trust
(A division of: Half Vast Enterprises)
"Most american millionairs today (about 80%) are first generation rich"[ Edited by WheelerDealer on Date 01/19/2004 ]
Conti and Finkel found a way around the inheritance tax and a way to pass on the 1031 through a trust to the heirs and give the IRS the finger.
I haven't tried it personally but it was intriguing on their course.
RAndall
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Quote:
bgrossnickle wrote:
Actually I think IRA is different example than a 1031. All IRA money is pretaxed and is taxed when you withdraw it at your current tax schedule. So the theory behind the IRA is that you can put more money in, because it is pretax, and you will be at a lower tax bracket when it is withdrawn.
Yes, is true for a Traditional IRA but not so with a Roth IRA. You put in taxed income and take out tax free money. A 1031 is much like the Traditional where you wait to pay the taxes on the gain.
Of course you can always cheat and submit low appraisals on future gained properties. By inflating operating costs you can always hold the future yields down and in the larger estates this seems to be the game plan. It goes on and on.
Remember at that great date in the future when all has to be liquidated and you stand at judgements door. The Field Agent from IRS will also be there and in his or hers hand will be this very large print out going back in time, listing the 1031 exchanges and the amounts involved. With this mass of paper they will attempt to send you on your path free from lien and judgement and stripped of course of all your earthly possessions. Your Heirs Legatees Devasees whatever will take up the good fight. So arm them well with properly documented transfers attached to which should be the "adjusted appraisals" Etc.
As I hover at that goodly place, neither here or there, I smile, cause I know the ones I fudged, I know all the delayed in recordation deeds that I utilized and all the apothications in three directions to spread assets. The parallel trusts and other goodies too numerous to be named.
I would be worried about my ultimate destination except I know that god would not mix me in with attornies and IRS agents and High Listing Real Estate Brokers and Mortgage Brokers offering great loans at 3% interest for six months only and 10% fees. Besides I tith, well not really but I did raise the rent on the Baptist church for my client the elderly agnostic. The Pope loved me for that and has offered a letter of recommendation. Both of the Luthers are of cross twirling in their graves. Ah well back to work Luv.
Lucius
<IMG SRC="images/forum/smilies/icon_cool.gif"> <IMG SRC="images/forum/smilies/icon_cool.gif"> [ Edited by Lufos on Date 01/19/2004 ]
Please correct me if I'm wrong....The way I understood a 1031 to work is that once your assets pass to your heirs, they pass at their stepped-up value....meaning if your heirs keep the property, they pay no taxes, and if they sell the property soon after you die, the stepped-up value virtually eliminates the capital gains. So unitl that great day as Lucius refers to (and so eloquently, I might add, as usual), when the time is right (and I have NO IDEA to determine when that is!!) keep "trading up" your properties to increase your cash flow/net worth. And educate your heirs on their future options.
OK, forgetting about giving Uncle Sam the finger from the grave - If you have done several 1031 and then you just cash in the chips, how are you taxed. With an IRA, you do not have to keep track of all your trades, reinvestements, etc because you are taxed at one rate when you have a withdrawl. For a 1031, I was under the impression that each deal is recorded and the detail must be kept to ultimately figure out your taxes.
Does anyone have a mini example to poast?
Thanks
Brenda
Brenda,
You need to keep track of your cost basis when using 1031's. Here's an example:
Lets say you sell a property for 100k and make 50k profit, and you then purchase a 200k property using a 1031 exchange. You cost basis is immediately 150k, not the 200k that you purchased it for. If you sold it tomorrow for 200k, you would be taxed on your basis which would show a 50k gain. If, say you sold the second property 5yrs down the road for 400k, your cost basis would be 150k (depreciation and improvements not withstanding) and you would be taxed on 250k gain. If you used that 250k gain to purchase another property for 700k, then your immediate cost basis would be 450k (700-250). If/when you end up getting taxed down the road (a long one hopefully) you will be taxed on your accumulated gain at whatever the prevailing rate is at that time.
Hope this helps.
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Swetbak[ Edited by swetbak on Date 01/20/2004 ]
In a real estate transaction, you pay taxes on the difference between your "basis" in the property (which is basically your purchase price plus all of the expenses you have not already deducted) and your net sales price (sales price minus sales expenses)
In a 1031 exchange, basically your basis for the old property is transferred to the new property. Plus any new expenses that would get added to the basis.
Silly example: I have 5 apples that I paid $5 for. You have 5 bannanas that you will sell me for $5 plus my 5 apples. I now have a basis of $10. ( The $5 cash I paid for the apples, plus the $5 cash I paid the bannana guy.)
If I sell the bannanas for $25, in the future, I have a gain of $15. If the bannanas rot and I can't sell them, I have a loss of $10.
If I die, my son gets my bannanas at the current market value of $25. So when he sells, his basis is $25. However, the gain between my $10 basis and his $25 basis is taxable to my estate, if my estate is large enough.
Hope this helps.
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Quote:If I die, my son gets my bannanas at the current market value of $25. So when he sells, his basis is $25. However, the gain between my $10 basis and his $25 basis is taxable to my estate, if my estate is large enough.JoanAlyce1,
A slight correction. Your federal estate taxes are computed on the value of your estate, not just your unrealized profit. In your example, the bananas you left your son have an appraised value of $25 and your estate (if large enough) will be taxed on the full $25.
Quote:Lets say you sell a property for 100k and make 50k profit, and you then purchase a 200k property using a 1031 exchange. You cost basis is immediately 150k, not the 200k that you purchased it for. If you sold it tomorrow for 200k, you would be taxed on your basis which would show a 50k gain.swetbak has the right idea, but a little clarification may be needed here.
If you sell a property for $100K and make a $50K profit, then your original basis is only $50K. When you exchange this property for a $200K property, you will have to add an additional $100K to the acquisition.
The cost basis for the relinquished property becomes the basis of the replacement property increased by any cash added to the deal. Therefore, the original $50K basis in the relinquished property plus the $100K in new money added to the replacement property acquisition is how the basis in the replacement property became $150K.