What Is Section 1031 Of The IRC Code?
December 17, 2009 by Taxcut Editor
Filed under Personal and Business Taxes
Section 1031 of the Internal Revenue Code allows a real estate investor or an owner of an investment property to exchange their property, thus deferring payment of state and federal capital tax gains. This is applicable if they purchase a “like-kind” property that adheres to the regulations and rules of the IRS 1031 exchange. This will allow the investor to use all of the proceeds from the sale to acquire a more valuable real estate holding, diversify into other properties, increase their cash flow, or consolidate into one property to reduce management tasks.
One major point to understand is what qualifies as a 1031 like kind property. The IRS states that in order to qualify, an investor shall incur no loss or gain on the exchange. A few examples of properties that can be exchanged include duplexes, single family residences, commercial properties, apartments and even raw land. For instance, you can exchange an apartment rental for a single family home rental, commercial building, etc.
Under a Section 1031 you also have the benefit of not having to complete the exchange simultaneously, as you have a total of 180 days to complete the entire transaction. But, keep in mind that you only have 45 days after closing on your old property in which to identify your potential replacement property under the 1031 rules.
It is also possible to sell a property under the 1031 exchange property code that has been used for both residential and business purposes. The major requirement is that a clear distinction must be present in the records of the taxpayer, with regard to the property that has been used for business versus the portion that is for personal use. One example of this that would be allowed under the 1031 exchange real estate rules is a bed and breakfast, and using the property as part personal residence and part business property. The same principal applies for the taxpayer who deducts a portion of his or her residence for a home office, as it is considered business usage.
Section 1031 can also be an effective strategy when selling a primary residence that contains excess land around a personal residence, and is used as an investment property. For example, take an owner who has a personal residence that is situated on 25 acres of land, yet it has been determined that the usual and customary acreage for similar properties in the vicinity are on an average only 3 acres in size. If the taxpayer has been holding the 22 excess acreage for investment, then under 1031 exchange rules the excess acres can be exchanged.
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What Is The Internal Revenue Code 1031 About?
December 16, 2009 by Taxcut Editor
Filed under Personal and Business Taxes
Naturally, every real estate investor wants to know how to make the Internal Revenue Code 1031 work best for them. They may think it is just for investors who have multi-million dollar properties, however that is incorrect. If an investor wants to sell their property, not have to manage real estate again and have their cake and eat it too, then a 1031 property exchange is a powerful tool.
The 1031 real estate exchange is so powerful because is available to all investors, regardless of the size of their holdings, as long as the property has been used for investment or business purposes. No matter whether you are interested in selling undeveloped land, a multi-family dwelling, a strip mall or hotel property, the 1031 is a great tool to use for deferring non-recaptured depreciation and capital gains.
Many investors who chase market appreciation realize that investments must make financial sense and produce enough of a cash flow to be justified. The Internal Revenue Code 1031 provides them with the ability to redirect their investment dollars without incurring capital gains taxes. By realigning their real estate holdings, they are doing themselves one of the biggest favors possible, especially in a tenuous marker. This allows for advantageous bargains that become available as they reinvent their strategies and utilize the benefits of a 1031 like kind exchange.
One of the biggest developments in the section 1031 exchange is the variety of replacement property choices that now exist. Originally, investors were limited to locating new property that would carry pretty much the same headaches as their old property; however, IRS procedure 2002-22 codified TIC exchange (tenant-in-common) and this was basically the birth of a new real estate industry.
Naturally, many real estate investors become fed up with having to deal with hands-on management, with all of the capital improvements necessary and the increasing operating costs, thus making the Internal Revenue Code 1031 a perfect solution to a great real estate exit plan. Older investors are looking for income streams, and now they can sell their properties under a 1031 exchange and obtain TIC interest. This turns the management aspect along with the profit and loss statement over to a group of experts and the investor receives a steady income stream. This also allows them to exchange their property and later turn it into their primary residence all without worrying about capital gains.
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Claiming a Deduction for Your Home Office
April 22, 2009 by Taxcut Editor
Filed under IRS News Items
03-18-09
Claiming a Deduction for Your Home Office
Taxpayers who use a portion of their home for business purposes may be able to take a home office deduction if they meet certain requirements.
In order to claim a business deduction, you must use part of your home for one of the following two reasons:
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Exclusively and regularly as either: your principal place of business, or as a place to meet or deal with patients, clients or customers in the normal course of your business. Where there is a separate structure not attached to your home, the regular and exclusive use does not need to be your principal place of business as long as the use is in connection with your trade or business.
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On a regular basis for certain storage use — such as storing inventory or product samples — as rental property, or as a home daycare facility.
Generally, the amount you can deduct depends on the percentage of your home that you used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it.
There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
If you are self-employed, use Form 8829 to figure your home office deduction and report those deductions on line 30 of Schedule C, Form 1040.
Different rules apply to claiming the home office deduction if you are an employee. For example, the regular and exclusive business use must be for the convenience of your employer.
For more information see IRS Publication 587, Business Use of Your Home, available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
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