The Best Of All Worlds — Sell & Pay No Taxes — No 1031 Exchange

Posted @ 4:39 pm - Filed under Cool Info

I saw a broker with whom I used to do a lot of business while getting some stuff at the store the other day. After we went through the normal ‘what you been doin'’ stage, he asked me the same question my clients ask most. “Jeff, I remember one time you said many of your clients were selling their income properties without paying any capital gains taxes, and without using the tax deferred exchange, but I don’t remember your explanation of how you did it. Are you still able to?”

Yes — and it’s not rocket science, though I guess it’d be better to try and make it look like it is. I have two kinds of clients who end up with a bunch of unused depreciation. Those who have vowels in their first names, and those who have vowels in their last names. (I wasn’t a stand-up comic in a previous life.)

NOTE: There’s one exception: Clients who’ve established themselves as ‘in the business’ usually will have somewhat less unused depreciation than those who haven’t. We’ll talk about that another time.

It’s ironic that I’ll be talking later this week on cost segregation (CS) because that concept turbo charges your chances of selling without capital gains taxes. Most of my clients accumulate unused tax shelter (depreciation) without the employment of CS. One client won’t be allowed by the tax code to use depreciation because (and I swear I’m not making this up) they make too much money. Another client will have leftover write-off because he owns so much property he can’t possibly use it all. For example, I have a client who doesn’t make all that much income any more, but has around $300K in depreciation yearly — without CS.

So how do you sell for a hefty profit without paying capital gains taxes?

It works like this. You have a residential income property (just an example — it could be any kind of investment property) that you can sell now for a $250K capital gain. You’ve managed to accumulate way more depreciation than that. You can apply your unused depreciation against your capital gain — and Boom! no taxes. However: Each property may use only it’s accumulated depreciation against it’s own capital gain. This is because the nice folks who decided you made too much money at your job, knew that they couldn’t just take it away from you and leave it at that. They had to throw you a bone. Little did they know that most folks would end up stowing that much of it away. As a matter of fact, most investors aren’t aware of the pile of gold they now possess.

There are things we add to clients’ Plans that most investors don’t know they have on their menu.

How ’bout taking a year off? Seriously. How much do you need? If your portfolio is at least larger than small, it’s a possibility. This works especially well for investors without kids or kids grown up and gone. How about funding a business startup? You’ve done a business plan and you need $100K to do it right. You’d rather not refi your properties for whatever reason, and selling means you have to pay taxes.

Not so fast taxpayer breath.

What else might you do if you could tap into some tax free profit every now and again? I’ve been using it for several things with my clients. The common thread though is they can afford to sell the property without damaging their ultimate Plan for retirement.

Of course the key to executing this is having a Purposeful Plan and doing everything on purpose. There are very few happy accidents in real estate investing. You need only ask an experienced investor to verify that.

So big freakin’ deal you say. I’ve already been investing for quite awhile and I haven’t accumulated spit as far as depreciation goes. More good news oh pessimistic one.

You can go back retroactively and get all your ‘back benefits’ in one year. Oh yeah sure, now your face is cracking just the hint of a smile. Can you see what you’ve been missing all these years?

What you’ve been missing is the real purpose of this post. You need an experienced professional showing you the way. It doesn’t matter where you live or where your investments are — a real pro doesn’t care where you live or where you’ve invested. I know I don’t.

Time is passing and your retirement isn’t farther away than it was yesterday.

The investors with strong pros showing the way out-perform the market two or three to one. No lie. My clients do just that over the long haul.

Are you?

This entry was posted on Monday, March 5th, 2007 at 4:39 pm and is filed under Cool Info. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.