Tampa Real Estate: Saving on Property Sales Tax
Tampa real estate prices are now being significantly goaded by the purchase of second homes, which account for as much as 40 % of the market. There is an overabundance of equity that has accumulated throughout the last five years or even more. People avert from paying capital gains taxes, which can amount to as high as 30% of the total gain. For those who are not yet aware of it, investors actually do not have to pay sales tax on their Tampa real estate investments regardless of whether or not they lived in them previously by using IRS Sections 121 and 1031.
Many people are familiar with IRS Section 121, dubbed as the “homeowners’ exclusion law,” This law applies to your principal residence and allows a gain exclusion of $250,000 for single people and $500,000 for married people filing jointly. The gain exclusion funds do not have to be reinvested. There are requirements, such as the property must have been your residence for at least two years out of the past five-year period.
The other relevant law, IRS Section 1031 or the 1031 exchange, can even be used on a personal residence that has been converted into an exchange property, and the way you do it is you move out of your residence and a year later it can be an exchange property. IRS Section 1031 is basically an unlimited tax break—as long as you roll the money from the investment, non-owner-occupied property into another real estate purchase within six months, you will not incur property sales tax.
Combining Sections 121 and 1031 can create an even greater tax shield for your Tampa real estate transaction. If a couple lives in a multi-family unit building, Section 1031 can be used to exchange the portion of the property that they do not live in and no taxes on the transaction are incurred when they purchase another real estate investment property. Section 121 can be applied to the unit the couple lives in. In this way, the unit they reside in is sheltered up to $500,000 in gain, and the remainder of the building is valued and exchanged as investment property under section 1031.
Dividing the value between your residence and your investment property can be determined by the calculation of square footage or an appraisal of the unit that you are living in. It is not necessary to pay capital gain taxes if you plan it, but what is required is that your next move always be a trade into something else.
Using the 1031 exchange, you can buy an investment property and, after just one year, you can live in it. You can even sell one investment property and exchange it for more than one property.
The clear victory comes when the taxpayer who resides in a mixed-use property takes advantage of Sections 121 and 1031 to remove all taxes on gains and diversify into other properties. Obviously, living in a property that appreciates in time and does not present you with a tax bill as you leave certainly provides a very welcome stay.
In a competitive market like the Tampa real estate market, any investor would need to cut down on costs as much as possible to compensate for the drop in sales prices. It is important to be aware of the available laws mandated in our Constitution that can spell the difference between saving and wasting dollars on your Tampa real estate investments.
Earl Juanico http://www.tampa-realestate.biz
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