Defer taxes by buying ‘like kind’

More homeowners are including investment properties in their estate planning and investment portfolios these days.

“It used to be that on a scale of 1 to 10 in importance in estate plans, real estate was about a 5. Now it’s at 8,” said Yaron Hassid, a Beverly Hills attorney and broker. “Real estate values have been going up so rapidly that it’s now seen as a safe investment. Five years ago, the stock market was perceived to be safe with 10% returns.”

One way that property investors can take advantage of the market and defer capital gains taxes is by selling their investment property and buying a “like kind” rental property, he said.

The property owners would file for a Section 1031 exchange on their taxes, which allows investment-property owners to defer federal and some state taxes on the sale of that property if they buy another investment property. Some investors reinvest in a rental house that they plan to eventually occupy as their principal residence.

If the replacement property is sold and not exchanged for another investment property, the original gain that was deferred and any additional gain is then subject to tax.

Anyone buying or planning to sell an investment property should consult an expert who knows the tax codes and rules governing these transactions.

*

-- Jennifer Lisle