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. 
The most familiar is the 1031 exchange. The other is called a Section 121 Exclusion.
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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Copyright © James Wexler * 1031 Exchange Opportunities in Phoenix *
Contact James Wexler (480) 221-8080 for your Phoenix | Scottsdale area Real Estate needs
Great Post.
One disturbing trend that people should also be aware of in 1031 exchanges is abuse and mismanagement of money by exchange companies. I encourage everyone to thoroughly vet any potential qualified intermediary.
Consider working with a 1031 exchange company that deposits your money only in money-market accounts that invest in government backed securities. With uncertain market conditions, it’s the only way to ensure your money will be there when you need it. I only know of one such company, RockSolid 1031. You can check out their website at http://www.RockSolid1031.com.
Do your clients own real estate anchored by what they thought was a “Credit Tenant” when they bought it? Do they still have a definition of a “Credit Tenant”? If they do, I bet their, and your, definition and their list of who they believe “is” a Credit Tenant today is a lot different than it was a year ago. And, if you are like me, your list is smaller today than it was even three months ago! The ratings of former stock market behemoths have been reduced to “pink sheet” status and more and more publically traded companies are on the ropes.
Your astute clients know that real estate is still one of the best investments they can make. But, if your clients want to sleep well at night knowing their capital is safe and will provide a return “of” investment in addition to a return “on” investment where can they safely place their capital or 1031 proceeds?
The absolute best and safest tenant was and still is The Federal Government!
Here is a RARE Opportunity to acquire a building with the Federal Government –The Department of Homeland Security– as a tenant. And, unlike most government leases, there is NO KICK-OUT CLAUSE!
In addition to the safety of income stream this property offers:
4% Annual Rent Increases to rapidly escalate Net Operating Income and Cash-On-Cash Returns!
Tenant pays ALL Operating Expenses and has a 10+ year operating history in this property.
Tenant has remodeled and upgraded the building at their expense!
This property will not last. In fact, the current owner was so excited when this building became available he bought it the day it went on sale!
Summary marketing information at http://www.praedium-advisors.com/dhs.pdf
PS – 2% co-broke fee to you!!