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By Ilyce Glink
11/6/2008 8:00:00 AM
Q: We are Canadian citizens who have owned a home in Fort Myers, Fla., for four years. There is no mortgage on the property.
We have put the property up for sale, and have made a down payment on a new house. We have bought and sold in the past, and I understand that as long as the new house is equal or higher in value, there are no capital gains taxes owed on the profits under IRS tax code 1031.
What happens if we have to close on the new house and the existing one has not sold yet? When it does sell, will we be able to use the proceeds of the sale to pay off the new mortgage with no penalty?
A: A 1031 tax-free exchange is used when a real estate investor sells a piece of property and purchases a replacement property that costs at least that much or more. The exchange must happen within a specified period of time. You have 45 days to identify the property and 180 days in which to close.
Many real estate investors are finding that the slow real estate market makes it tough to adhere to the deadlines. What can you do? You can set up a reverse exchange, in which you purchase the new property first and then sell the existing property afterward.
A qualified 1031 exchange company should be able to handle a reverse exchange. But be prepared, as reverse exchanges cost significantly more than a regular 1031 exchange. You should also hire a real estate attorney to make sure you're doing it correctly and meeting all of the necessary deadlines.
A 1031 tax-free exchange cannot be used on personal property, so be sure that you are not using the property more than the time allotted by the Internal Revenue Service (IRS). Your 1031 exchange company should be able to advise you.
Q: I am one of three siblings. I was living in the home with my mom. She passed this weekend, and there is no will. I want to put the house in my name. What do I need to do?
A: I'm so sorry for your loss. There will be some tough days ahead.
The house will have to go through probate. If there is no will telling who is supposed to get the house, then your mom's assets will be divided according to state law. Typically, that would mean her spouse (if she has one) would get half and her children would get the other half of the estate. If there is no spouse, the children (your siblings) will likely divide the estate between them.
That means that unless there are other assets you can trade your siblings for their share of the property, it is likely that all three children will have to share ownership of the property. If you then want to buy out your siblings so that you own the property, the three of you will have to decide on an appropriate market price.
Please talk to an estate attorney who can walk you through the process of making this happen.
Q: I have three rental properties. Two are paid for. The other one has a mortgage balance of $20,000 with 11 years to go until it is paid off. The interest rate is 6.575 percent. Should I pay off this mortgage?
A: I don't see why you'd pay that off at the moment, unless you have an extra $20,000 in cash you don't know what to do with it.
With rental properties, the idea is to offset the income with expenses so you pay less in taxes. Capital gains taxes are capped at 15 percent at the moment, but income tax is capped at 35 percent. So paying less in income taxes is a better deal for you.
These numbers may change depending on who wins the presidency (or the recognition that the current credit crisis requires more revenue to succeed). But if you can offset some income, you'll pay less in taxes.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
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