The tax implications of real estate transactions and real estate investments can be numerous and complex. Whether considering the purchase or sale of a single-family home or a complex commercial deal, both buyers and sellers should work with a qualified accountant or other tax advisor. In fact, you should consult with your accountant and tax advisor before you structure a deal or sign a contract to avoid stumbling blocks later in the transaction.
Choosing the “Tax Man”
If you need to find an accountant or tax advisor, get a referral from your business associates, friends or family. Look for expertise in real estate matters and membership in professional associations, as well as experience and education. For information from the Wisconsin Institute of Certified Public Accountants about choosing and using accountants, as well as a list of certified public accountants in Wisconsin, visit www.wicpa.org.
Timing Counts
Buyers and sellers should consult with their accountants regarding transaction timing. It may be in your best financial interest to expedite or delay a closing, based on your financial position. The year in which the closing takes place may have beneficial tax consequences and may dictate contract terms and conditions. Also, capital gains exclusions may be affected, depending on how long you have owned your home.
Selling Home, Sweet Home
How long must you own your residence before you can sell it without paying any capital gains tax? Your tax liability must be determined on a case-by-case basis in consultation with your accountant or tax advisor. In general, if you have occupied the property as your homestead (personal residence) for two of the last five years, you may be able to avoid capital gains tax on a profit of up to $500,000 for a married couple, or $250,000 for a single individual. The IRS uses ownership and use tests to determine eligibility for capital gains exclusions. For additional information about capital gains exclusions when selling your home, see IRS Publication 523 – “Selling Your Home” – online at www.irs.gov/pub/irs-pdf/p523.pdf.
Do You Want to Trade?
Generally, if you exchange business or investment property solely for business or investment property of a like kind, no gain or loss is recognized under Internal Revenue Code Section 1031. IRS information about like-kind exchanges is available at: www.irs.gov/publications/p544/ch01.html#d0e2019.
In a Starker or Tax-Deferred exchange, the like-kind exchange need not be simultaneous as long as strict IRS requirements are precisely followed. The old or relinquished property and the new or replacement property must be held for productive use in a trade or business or for investment purposes. You must identify the replacement property to be received in the Starker exchange within 45 days after you transfer the relinquished property, and receive the replacement property generally within 180 days after your transfer of the relinquished property. IRS information regarding deferred exchanges is available at: www.irs.gov/publications/p544/ch01.html#d0e2311.
Are these exchanges right for you? Ask your accountant!