Real Estate Conversions

05 November 2013 / Video Blog / Comments Off on Real Estate Conversions

Welcome to another edition of Tuesday Tidbits where we make tax and accounting simple. I'm your host Charles D. Shapero, CPA with Widget Bookkeeping & Tax and we're going to talk about some pro-tax payer provisions today. IRS Code Section 1031 and 1033. Both of them deal with gains in real estate. What's that you say? We haven't had gains in real estate in some time. Hopefully that's changing! What 1031 allows you to do is sell real estate whether it be land, apartment building, house or any other US real estate, and you can take the proceeds from that real estate, and directly invest them in other pieces of real estate. The thinking behind Congress, in passing this code section is, that you never got the cash from that sale, so you really shouldn't have to pay the tax on that sale at that time. All that cash got put into another real estate. So maybe you sell one strip mall and invest in a bunch of apartment buildings. That cash is tied up, you don't have the wherewithall to pay that tax. So 1031 allows you if you follow it's provisions, to not pay tax until that second piece of real estate is sold. 1033 is a very similar code section but it deals with involuntary conversions That's if you didn't sell a house but what if your house burns down, the insurance company comes in writes you a big check, you have gains! But you want to use that insurance check to bring that house back, or maybe buy another one. Therefore, the IRS Code Section says if you have a gain on that piece of property, you don't have to pay it until you sell the replacement property. With the 1031 I have 45 days from the time I sell my first property to pick out my replacement property, and then I have six months to consummate the deal. WIth 1033, obviously I didn't think about buying a replacement property, I didn't even know my first property was going to be destroyed. I have full two years to reinvest those proceeds, and not pay taxes. Both those provisions are really not tax saving provisions they are tax deferral. The IRS is eventually going to get their money, unless you pull a Houdini trick and you die before you pay taxes. If you do that you can use 1031 and 1033 to escape tax, but it's not advised. This concludes today's Tuesday Tidbit, see you next Tuesday. Widget Bookkeeping & Tax: Know More, Keep More!

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