From 2001-2005 the greater Phoenix area experienced a real estate boom that saw gains of more than 100% return on capital appreciation (Phoenix home values) in most areas. Some areas, like Scottsdale, Fountain Hills and Paradise Valley, AZ saw even greater gains in real estate prices.
If you purchased property in Metro Phoenix, Glendale, Peoria, Scottsdale, between 2001-2005, it is likely you have equity or capital appreciation in your Phoenix area homes.
If you are considering selling you home, there are several IRS laws that allow exclusion of taxation on capital gains made on real estate.
a 1031 exchange is a tax vehicle used to defer capital gains taxes on when selling an investment property at a profit and then using the proceeds to buy another investment property.
The key points of a 1031 exchange is that capital gains are deferred, not excluded. This means that when you take the entire proceeds of the sale of the fist property and use them for the sale of a second (AZ investment) property, there would be no capital gains realized.
Here are the basic rules of 1031 exchange:
- 1031 exchange is for investment property only
- Capital gains are deferred, not excluded
- buyer must identify the new property 45 days when the previous property was sold (transferred)
- Close of escrow on the new investment property must be within 180 days of the sale of the previous investment property
- A Qualified intermediary – should be in the full-time business of facilitating 1031 exchanges. The role of a Qualified Intermediary is similar to, but not identical to, the role of an escrow company. The Qualified Intermediary is essential to completing a successful and valid delayed exchange. The Qualified Intermediary does not provide legal or specific tax advice to the exchanger. The qualified intermediary is used to hold the funds in a third-party escrow.
- The buyer can never take possession of the funds between the two transactions
A Section 121 exclusion also deals with capital gains on real estate. However, unlike a 1031 exchange, a section 121 exclusion is for a primary residence only. You cannot use your section 121 exclusion for an investment property (or a second home).
- $250,000 of capital gains can be excluded from taxes for individual filers.
- $500,000 of capital gains can be excluded from joint (married) filers.
- The owner must have lived int he property for at least 2 years
There are a variety of real estate investment & tax planning strategies that you can use to take advantage of the many great opportunities for homeowners to sell their Phoenix, AZ investment properties and/or primary residence and roll the money into new real estate opportunities in Maricopa County. Yes, you are selling lower than you would have years ago. However, you are buying even lower. (see: Sell Low, Buy Lower).
Here are 3 great income tax strategies you can use to buy real estate in greater Phoenix, Scottsdale, Paradise Valley, Peoria to maximize profit by limiting the amount of taxes you may need to pay.
- Investment property acquired with no 1031 exchange and converted to a primary residence
- Investment property acquired with a 1031 exchange and converted to a primary residence
- Primary residence converted to a an investment property and then sold in a 1031 exchange to purchase a new investment property
Used correctly, the 1031 exchange and the section 121 exclusion, in theory, if you continue to sell the new property and continually use the proceeds to buy an additional property using a 1031 exchange you may never need to pay the capital gains taxes.
It is important to note that I am not an attorney, CPA, or qualified intermediary. The context above is for information purpose only.
If you are going to use any IRS tax strategies or planning, I strongly suggest you speak with an attorney and/or CPA for advice.
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Contact James Wexler (480) 221-8080 for your Phoenix | Scottsdale area Real Estate needs