Whether you love, hate or could care less about the new un-repealed health care law, the fact is that it directly affects all investors. Stock investors, retirees with interest, and more specifically, real estate investors will now pay a higher tax rate on their investments. All investors will pay an additional 3.8% on investment income or capital gains if their incomes are greater than $200,000.
$200,000 does seem like a lot if income but when you are a long term real estate investor that may be one transaction. Let me give you a scenario seen all the time in South Florida. Mark and Mary Smith come to Sanibel Island and buy a rental condo. They use it two weeks a year. Mark and Mary are each employed in downtown Chicago and make $260,000 combined. That is not rich in Chicago with 10.25% sales tax and 5% state income tax. If they sell that condo and make $100,000 net profit, their tax rate is now at minimum 23.8%, this includes Illinois tax and the new 3.8% health care tax. This does not include recapture tax, in which case the rate is probably at least 2% higher. Bottom line is real estate transactions are now paying for healthcare.
So what do they do? Now is the time to reinvestigate IRC section 1031. A 1031 exchange will allow investors to defer or avoid tax if they follow the rules and purchase additional real estate. This deferral will include the new 3.8% health care tax. So back to our friends Mark and Mary; let’s assume they decided to take their gain from the sale of their Sanibel Condo and go back to Illinois. Chicago real estate has continued to drop, so it is at an all-time low. The Smiths must hire a qualified intermediary like 1031Tax Free Strategies to help facilitate the transaction. All of their proceeds go into escrow and they now have 180 days to complete the exchange. Within the first 45 days of that 180 day period, they will need to identify their replacement property(s).
The minimum tax savings with a 1031 Exchange in this example is $23,800. This means no money for Uncle Sam and $23,800 in real estate for Mark and Mary Smith. A 1031 exchange is an easy and common transaction.
To learn more about 1031 Exchanges and taking control over your valuable tax dollars, please contact the professionals at 1031 Tax Free Strategies at 239-333-1031 or visit our website at www.1031company.com.
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