Real Estate Investment Tips on Tax-Deferred Exchanges (1031 Exchange)

A tax-deferred exchange is a where property owner trades one or more relinquished properties for one or more replacement properties of “like-kind”. The payment of federal income taxes and some state taxes on the transaction is deferred until a later date, instead of a typical transaction where the property owner pays the taxes on any gain realized from the sale.  The exchange, however, is not tax-free.  When the replacement property is ultimately sold, the deferred gain as well as any additional gain realized is subject to tax.

Section 1031 of the Internal Revenue Code states “that no gain or loss is recognized on the exchange of property held for productive use where the property owner has reinvested the sale proceeds into another property.  For example, if vacant land is exchanged for an apartment building, the taxpayer could not be forced to pay taxes on “paper gain”.  The general guidelines to be met in order to allow the taxpayer to defer all taxable gain are that the value of, equity in, and debt on the replacement property must be equal or greater than the value of the relinquished property.  Also, all of the net proceeds from the sale of relinquished property must be used to acquire the replacement.”

The main reason to exchange property instead of selling is the ability to postpone taxes or potentially eliminate them all together.  That way you are able to use the money saved towards investing in another property, and you receive an interest free loan from the federal government in the amount you would have paid in taxes.

Before considering a tax-deferred exchange, there are a few requirements that allow for this replacement.  First, your property must qualify.  Properties that are specifically excluded are: inventories, stocks, bonds, or notes, properties held primarily for sale, interests in a partnership, certificates of trusts, and choses in action.  Also, both the relinquished and replacement property must be held for productive use in a trade or business investment.  Immediate resales or the taxpayer’s personal residence do not qualify.

Tax Deferred Exchange

For a deferred exchange, the properties must be of “like-kind”.  This means they must both be located in the U.S. and must qualify.  Personal properties must be of like-class.  It is also a basic requirement that the relinquished property must be directly exchanged for the other property and cannot be sold for cash to be used in purchasing the replacement property.

Tax-deferred exchanges can be very beneficial for the taxpayer planning to sell an investment or property.  As long as the IRS guidelines are strictly followed, this method can be used as a wise investment strategy. Avoiding losses potentially as high as 30% due to state and federal taxes means allowing the proceeds to go towards future investments or make improvements to the replacement property. If you are considering a tax-deferred exchange for your property, contact us if you are interested in this type of transaction!

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Changes to Florida Land Trust Law

A Land Trust is an incredibly useful document that may benefit and protect you as a property owner.  Most tax advisers and U.S. attorneys are unfamiliar with the purpose and value of a land trust, and do not know how this device works.  Through the use of a land trust, you are able to keep matters of estate private and avoid probate (proving the legitimacy of a will of course).  This means avoiding a large amount of attorney’s fees and delays in property distribution to your beneficiaries.  With the laws constantly changing and adjusting, it is important to speak with a Florida Real Estate Attorney that can help you draft these documents could potentially save your and your family from unnecessary actions later on.

New Land Trust Law

The New Law

Effective June 28, 2013, there has been significant changes in the Florida Statues regarding land trust laws. Florida Statute Section 689.071 has been amended with the passage of House Bill 229, meaning this statute no longer contains the same third party protection features, which have been moved to Section 689.073. Trustees are now able to deal with trust properties under the powers of the deed and do not need to disclose the terms of the trust. Starting immediately, deeds where the title is taken by a trustee with trust powers stated in the deed will now refer to the new laws.  These changes may affect you and could create legal implications you are not aware of.  Call Gulati Law today to find out if these new laws effect your current situation or if you are interested in drafting a land trust for your property or land.

Some Essential Estate Planning Tips

The ultimate goal of estate planning is to secure a better future for generations to come. There are six simple tips that can help make your estate plan more efficient.

The first tip is to define your goals you wish to accomplish with your estate plan.

Secondly, gather and organize your data. Review important financial documents, and review what assets you physically own. This is important because how you physically hold title in an asset, may take precedence over your will.

The third and fourth tips are to analyze and develop a strategy.

The fifth and final tip is to implement, track and monitor your plan.  It is important to finally implement your plan.

When drafting your estate plan, it is important to seek an attorney to help you. Like everything else in life, your estate plan should be tailored toward your needs and wants. Different states have different estate laws, so it is important to also seek an estate attorney from the state where you reside and where most of your assets are located.

Young Adults Need To Think About Estate Planning!

Most young adults do not think about future estate planning. However, reality is that you cannot predict the future outcomes of your life, whether there is an unfortunate disability or even death, estate planning for young adults makes sense.

It is unfortunate, but true that unforeseeable accidents and tragedies do happen to young adults, and are becoming more common in today’s day and age. When a young adult is under the age of 18 usually their parents make all of their medical and financial decisions for them. This unfortunately changes once you hit 18.

There are certain privacy laws that are in place to protect everyday people. This is a major disadvantage to someone who does not have an estate plan in place. For example, if you were to become incapacitated and over the age of 18, it is very hard for your family to make decisions about your medical care and financial situation, unless  you have the proper legal paper work in place. Sometimes hospitals and other service providers will not even talk to parents or family members if they do not have legal paperwork suggesting otherwise.

To prevent your family from going through tremendous difficult times during an already stressful time, you should schedule a consultation with an Estate Planning Attorney on your 18th birthday. They will guide you and draft forms that can help prevent situations as described above. Some of the forms will include, but are not limited to:

If you have any Estate Planning questions we invite you to contact us for more details.

Trust v. Will

trustEstate planning for you and your family can be a stressful task. One of the main questions that come up during Estate Planning is:

Do I need a Trust or a Will?

Wills are generally the easier of the two to set up. Even though it is the easiest to set up, it still has its drawbacks. Trusts are a great device if you are looking for privacy and greater protection, however they entail more work and costs.

Here are some more pros and cons:

  •  A revocable living trust is a private contract between the trust maker and trustee(s). However, a will has to go through probate, which of course is public record and anyone can read your last Will and Testament, list of beneficiaries and assets, and the breakdown of who gets what. This is not the safest way to protect your heirs, as public knowledge of inheritance can cause a lot of headache.
  • Another benefit of a revocable living trust is that you have the ability to plan your mental disability planning. This is a great protection if you or your spouse becomes incapacitated.
  • The main benefit of a revocable living trust is that you can avoid probate.
  • Trusts are considered their own legal entity in a sense, so you will have to change the name on registrations, deeds, and set up new bank accounts, if you want them to be part of the trust.

As you can see Trusts and Wills have both benefits and drawbacks. But, here is the real twist to trusts that most do not realize, you still should have a will drafted. Yes that’s right a will. Most people believe if you have formed a trust, you do not need a will. That is not completely true, because a trust takes time to draft and transfer to become valid, the will is an intermediary protection during this process.

If you have any more questions regarding Estate Planning for your future, please contact us today, we will be happy to help.

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