SAN FRANCISCO – Nov. 13, 2013 – Before the property investment deal is sealed, a seller should ask himself one important question: Do I know if I’ll owe taxes on the sale of the property, even if I’m taking a loss on it?
That question might be key to avoiding a common misconception: no profit means no taxes, according to investment specialists Rochelle Stone and John Mangham at the 2013 Realtors® Conference & Expo.
Once clients realize they could be facing a hefty tax bill, even when they’re selling at a loss, they could benefit from options that 1031 exchanges provide them, said Stone, president of Starker Services Inc. “Don’t let your clients leave their equity behind,” he said.
A 1031 Exchange is a tool for investors to defer capital gains taxes on the exchange of like-kind properties. The tax-savings strategy helps investors avoid a tax liability when they sell one investment property and buy another.
Stone cited one example: A client purchased a rental property in 2001 for $495,000. The property sold in 2011 for $477,000, an $18,000 loss. Yet, the owner faced a tax of nearly $20,000 on the sale, because taxes are paid on capital gain, not the equity or profit from the sale. The owner had claimed depreciation on the property over 10 years of ownership, netting an $80,000 gain that still had to be factored in. If the owner had done a 1031 exchange, the owner’s tax bill would have been zero.
While Realtors don’t have to be experts on 1031 exchanges, they should be able to ask the right questions to identify clients who should consult a tax attorney to see if they can unlock some of the benefits, the speakers said.
Some questions to ask clients:
• Do you know if there will be a tax hit from the sale of the property? (Encourage them to consult a tax attorney before the sale so they can explore options beforehand.)
• Are you sure there is no capital gain? (Make them aware of a difference between profit and capital gain.)
• What are your plans? Are you willing to invest in other opportunities?
Source: Melissa Tracey, Realtor Magazine
© 2013 Florida Realtors®