Posted by Ronald * Starr on September 05, 2001 at 20:11:02:
The most obvious way to avoid taxes is not to sell. Hold until you die. If you borrow money secured by the property there is not tax owed. Borrowed money must be paid back, so it is not income to you, sez the IRS. Of course, your renters pay it back and you pay taxes on the rental income–unless you have depreciation, loan interest expenses, and other expenses which “shelter” the rent from income taxes. This often happens for the first few years of ownership of a rental property. If you have too much income on the property, you may have to pay income tax on some of the rent.
The other way to avoid taxes is to exchange for another property. Watch out. There are two different kinds of properties. Those with which you can do a tax-deferred exchange (Section 1031 IRS code) and those with which you cannot do one. You can not do an exchange for properties that you bought to fix up and resell. Those are considered dealer properties–stock in trade.
You can do an exchange with properties that you bought as an investment, for the production of income, or for use in a business. The properties that you exchange into also must be in one of those categories.
You can’t go trading short-term holding properties for other short-term holding properties. Those you sell, pay your ordinary income taxs, then purchase another property with whatever you have left.
How long do you have to hold rental properties to make them exchangeable? There is no rule on this. Some accountants suggest over two years, some say over one year, some say not to buy and sell in the same tax year. The IRS talks about properties bought with the “intent” of holding for one of those three categories I mentioned above. Sometimes people have exchanged after short periods when they could show that they intended to hold for the long term. Then they had to sell for some reason or they got an extremely attractive UNSOLICITED offer to purchase the property from somebody or some organization, so they sold and got into a replacement property.
You have, for a delayed or “Starker” exchange 45 days after you deed away your current property to identify one or more replacement properties. You have to get the deed for the replacement property within 180 days of the deeding away of the property disposed of.
There are a lot more details I’m not discussing here. Before you try to do an exchange get some good advice or read some material on the topic. Or both.
Good InvestingRon Starr**